Assurance Contracts to Support Multi-Unit Threshold Public Goods in Environmental Markets

The free riding incentive has been a major obstacle to establishing markets and payment incentives for environmental goods. The use of monetary incentives to induce private provision of public goods has gained increasing support to help market ecosystem services. Using a series of lab experiments, we explore new ways to raise money from individuals to support private provision of multi-unit threshold public goods. In our proposed mechanisms, individuals receive an assurance contract that offers qualified contributors an assurance payment as compensation in the event that total contributions fail to achieve the threshold provision cost. Contributors qualify by contracting to support provision with a minimum contribution. Evidence from lab experiments shows that the provision probability, group demand revelation, and social welfare significantly increase when the assurance contract is present. Coordination is improved by the assurance payment especially for agents with values above the assurance level, leading to significantly higher aggregate contributions. A medium level of assurance payment used on units with medium and high value-cost ratios is observed to induce the largest improvement on social surplus. Our approach contributes to the private provision of environmental and other types of public goods.