Discussion Paper

On the dynamic selection of mechanisms for provisions of public projects

Abstract: This paper describes a dynamic model in which the provision mechanism for a public project is itself the object of locational choice of individuals. Individuals in an ongoing society must choose between a Majority Rule mechanism and a Voluntary Contribution mechanism. Each mechanism determines a funding decision for a local public project which is repeated over time. Generations of individuals asynchronously supercede their parents, creating an entry/exit process that allows individuals with possibly different beliefs to enter society. A self confirming equilibrium (SCE) belief process describes an evolution of beliefs in this society consistent with a self confirming equilibrium of the repeated location/provision game. Due to Fudenberg and Levine (1993), SCE is weaker than Nash as it requires correct forecasts of an individual only along the realized path during the individual's lifetime. Since individuals' beliefs on out-of-equilibrium behavior may vary, an SCE belief process may admit random and heterogeneous forecasts in the form of mutations of beliefs across generations as newborn individuals enter the system. It is shown that the process with belief mutation results in a globally absorbing state in which the Majority Rule mechanism is the unique survivor of the two.

Keywords: Finance, Public;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Discussion Paper / Institute for Empirical Macroeconomics

Publication Date: 1995

Number: 100