Thursday, June 16, 2005

Poker Model for Public Goods Funding

I became aware of this issue through Jim Henley.

To quote from the Wikipedia article on "Assurance contracts"
The free rider problem is a term for the fact that there may be actions that would benefit a large group of people, but once the action is taken, there is no way to exclude those who did not pay for the action from the benefits. This leads to a game theoretic problem: all members of a group might be better off if an action was taken, and the members of the group contributed to the cost of the action, but many members of the group may make the perfectly rational decision to let others pay for it, then reap the benefits for free. The result of this rational game play is paradoxically, lower utility for everyone.

Assurance contracts operate as follows:

In a binding way, members of a group pledge to contribute to action A if at least N-1 other members also make the same pledge. If N members sign the pledge (perhaps by a certain expiration date), the action is taken. If the quorum is not reached, the parties are not obligated to carry through on the action.


Liberals have an easier time with the notion of public goods than libertarians do. For the liberal, if it really is a public good, then you tax people to pay for it. But for the libertarian, taxation is unwarranted coercion, backed up by the threat of violence. So how does a libertarian expect to pay for something like a fire department, which benefits everyone, even those who didn't pay for it?

I'm not a libertarian, but I find it an interesting theoretical exercise to ask how something might be accomplished within the constraints of libertarianism. Here's my solution to the fire station problem.

Suppose we want to raise $1 million to build a fire department. If you don't provide some kind of incentive for making a donation, everybody will sit around hoping other people pay for it. How do we give people an incentive for contributing? I suggest we can structure it like a game of poker.

We start with a $1 per person ante on the first round. If we raise $1 million, we’re done. Otherwise, we increase the stakes to $10 per person for the next round. If $10 is too rich for your blood, you drop out, and your money is split among the remaining players.

Eventually, either we raise the $1 million, or else the last guy in gets all the money. So there is an incentive to contribute each round: if you are the only one to contribute, then you win the pot of money so far.

All the fun of Las Vegas, and all for a good cause!
An interesting side-effect of this protocol is that the richest citizens would end up paying the most for successful fundraising, but would gain the most for unsuccessful fundraising. So rich guys might have an incentive to start impossible projects: “Hey, guys! Let’s put our money together and build our own Mars rocket!”

4 Comments:

Blogger Kyle McCullough said...

I'm not sure about that one. It kind of sounds like a reverse ponzi scheme, where the people who stay to the end wind up with the money of the people who were in at the start.

6:34 PM  
Blogger Daryl McCullough said...

Well, that's the point---to encourage people to stay in until all the money is raised, and the fire house is built.

4:04 PM  
Anonymous Anonymous said...

Makes me think of the game where you auction off a dollar bill, with the owner of the dollar bill getting paid the bids of the two highest bidders. If the firehouse (or the Mars rocket) doesn't get built, the people who put in $100 will be annoyed.

5:12 PM  
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12:25 AM  

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