Private investment with social benefits under uncertainty: The dark side of public financing

Abstract

We develop a game-theoretic model of private-public contribution to a long-term project with sequential actions and moral hazard. A private agent is one who is in charge of both the financial contribution and the management effort, these two actions entailing private costs and uncertain ex-post private and social benefits. A public agent is one who decides the amount of public funding to this quasi-public good, knowing that the size and the probability of attaining a surplus ex post depend on the private agent's effort. We consider four publicfunding scenarios: benefit-sharing versus cost-sharing crossed with ex-ante versus ex-interim government intervention. We test our theoretical predictions by means of an experiment that confirms the main result of the model: Cost-sharing public intervention is more effective than benefit-sharing in boosting private financial contribution to the project. Furthermore, when public intervention comes after private contribution (ex-interim government intervention), both public-funding scenarios have a negative impact on the private management effort. In our model, the latter result is explained by the private agent's high degree of risk aversion. These results have policy implications for strategic investments with long-term social consequences.In deciding the optimal timing and method of the contribution, governments should also consider the indirect effects on agents' long-term management efforts. J Public Econ Theory. 2020;22:769-820.wileyonlinelibrary.com/journal/jpet Andreoni, Kuhn, and Samuelson (2018) analyze a two-stage game where in the second stage a two-period prisoner's dilemma is played, and in the first stage the players can choose the allocation of the stakes across the two periods of the prisoner's dilemma. They provide experimental evidence of a higher joint payoff in the second stage if in the first one the stake allocation is endogenously chosen rather than randomly determined. Although in a completely different setting, also in our two-stage game the first-stage choice-initial investment-positively affects the (private-public) joint payoff in the second stage.ATTANASI ET AL. | 771uncertain at the ex-ante stage and depend on the private agent's level of effort after the initial contribution.Thus, our model focuses on the sequential game between the public agent and a representative private agent and aims to determine the optimal contractual scheme to deal with the presence of uncertainty and asymmetric information.Although the two approaches differ, our main theoretical prediction confirms and extends a crucial result from Andreoni (1988a) and Bergstrom et al. (1986) regarding the total or partial irrelevance of public contribution to the total private supply of a public good. Andreoni (1988a) and Bergstrom et al. (1986) make different assumptions but show that, when the government supplies some amount of the public good financed by taxes, the government's contribution causes an equivalent or smaller reduction in the amount of private contribution (crowding-out...

Strategic Ethics: Altruism without the Other-Regarding Confound

“…High-reciprocity types in the Partner matching, once having built reputation in the first periods of the repeated game, would maintain it until the last periods, since this reputation is not "strategic" but rather due to sequential positive reciprocity. 10 Therefore, no end-game effect should be observed.…”