Coalitions Improve Coordination and Provision of Public Goods : Theory and Experimental Evidence

We study a public goods game with heterogeneous agents who care about their own payoff as well as of the player who receives the lowest payoff. The weight on own payoff varies across players, and is private information. We first develop a theoretical model and then test the predictions of our model in a laboratory setting under different parameter conditions. In both our model and experiments, introducing a coalition formation stage prior to making a contribution decision enables sorting of players according to their preferences, resulting in higher contributions to the public good. Additionally, we find that participants in our experiment take previous period outcomes into account while making current period decisions. These results help explain successful coalitions, like international environmental agreements, that are effective in creating real world public goods like reductions in carbon emission