Private Provisions of a Discrete Public Good with Voluntary Participation

This paper studies the mechanism that a profit-making principal should adopt to provide a discrete public good when the values of the consumers are their private information and their participation is voluntary. The free-riding issue is resolved through threatened nonprovision of the good by the provider. Every bidder is asked to announce his or her virtual value as defined in <link rid="b14">Myerson (1981)</link>. The public good is provided if and only if the sum of the bidders' announced virtual values exceeds the provision cost. When a provision decision results, each bidder pays an amount that is determined by the announcement of other consumers. No one pays when a nonprovision decision results. We find that this mechanism is implementable through an all-pay auction. A restricted profit-maximizing mechanism that implements efficient allocation is also characterized. As in <link rid="b6">Gradstein (1994)</link>, when provision is always efficient, that is, the sum of consumers' values always exceeds the provision cost, efficient allocation is achievable through a profit-maximizer. However, this is not the case when provision is not efficient. Copyright © 2009 Wiley Periodicals, Inc..