Efficient inter-group competition and the provision of public goods

Abstract

We propose an intergroup competition scheme (ICS) to solve the free-riding problem in the public goods game. Our solution only requires knowledge of the group contributions, is budget balanced and with the right parameters a dominant strategy. The main innovations of our design are that the prize to the winning group is paid by the losing group and that the size of the transfer depends on the difference in contribution by the two groups. With the right parameters, this scheme changes the dominant strategy from none to full contribution. We tested different parameterizations for the ICS. The experiments show dramatic gains in efficiency in all the ICS treatments. Moreover, versions of the ICS in which intergroup competition should not change the zero contribution Nash equilibrium also produce remarkable gains in efficiency and no decline in contributions over time.