International Finance Discussion Papers (IFDP)
July 2017
Efficient Public Good Provision in Networks: Revisiting the Lindahl Solution
Abstract:
The provision of public goods in developing countries is a central challenge. This paper studies a model where each agent's effort provides heterogeneous benefits to the others, inducing a network of opportunities for favor-trading. We focus on a classical efficient benchmark -- the Lindahl solution -- that can be derived from a bargaining game. Does the optimistic assumption that agents use an efficient mechanism (rather than succumbing to the tragedy of the commons) imply incentives for efficient investment in the technology that is used to produce the public goods? To show that the answer is no in general, we give comparative statics of the Lindahl solution which have natural network interpretations. We then suggest some welfare-improving interventions.
Keywords: Networks, public goods, repeated games, coalitional deviations, institutions, centrality, Lindahl equilibrium.
DOI: https://doi.org/10.17016/IFDP.2017.1210
PDF: Full Paper