Pareto-Efficient Solutions for Shared Public Good Provision: Nash Bargaining versus Exchange-Matching-Lindahl

• Published in: Resource and energy economics 2020-08, Vol.61, p.101179, Article 101179
• Main Authors: Dijkstra, Bouwe R., Nentjes, Andries
• Format: Article
• Language: English
• Subjects: Exchange; Lindahl mechanism; matching; Nash bargaining solution; outsourcing; public goods
• ISSN: 0928-7655; 1873-0221
• DOI: 10.1016/j.reseneeco.2020.101179

•There is an economy of n heterogeneous agents who consume and produce a public good Q•We compare the Nash Bargaining Solution (NBS) to the Exchange-Matching-Lindahl (EML) mechanism•In EML each agent states her demand for and supply of Q, given her exchange rate•Without outsourcing, high-benefit/low-cost agents are better off with EML for n > 2•With outsourcing, EML usually has lower payments for production above contribution We compare two cooperation mechanisms for consumer/producers of a public good: the Nash Bargaining Solution (NBS) and the Exchange-Matching-Lindahl (EML) solution, where each agent specifies her demand for and supply of the public good according to her personal exchange rate. Both mechanisms are Pareto-efficient. EML is equivalent to matching. In our specific model with linear or quadratic benefits and quadratic costs, EML and NBS are equivalent when there are two agents. With more than two agents, the high-benefit/low-cost agents are better off under EML. We also analyze outsourcing, where agent i can pay agent j to produce the amount that agent i promised to contribute. In our specific model, payments from high-cost to low-cost agents (and from high-benefit to low-benefit agents) are (usually) lower in EML than in NBS.