Incentive Compatible Mechanisms for Providing Environmental Public Goods

Abstract

This paper summarizes the results of two experiments designed to evaluate the applicability of incentive compatible mechanisms such as the pivot mechanism to determine the public’s preferences for environmental public goods. The first experiment employs a variant of the pivot mechanism to determine the appropriate level of a public good that is available in three discrete quantities. Although traditional public goods mechanisms determine the allocation of the good in continuously variable quantities, for many environmental public goods, such as the cleanup of a hazardous waste site, there may be only several discrete options that are feasible. The results indicate that using the pivot mechanism can result in truthful revelation of preferences for the public good, and hence selection of the optimal amount of the program to be implemented. The second experiment compares the ability of real and hypothetical versions of the pivot mechanism and provision point mechanism to generate accurate estimates of the public’s willingness to pay for open space. The results provide mixed evidence of real and hypothetical versions of each mechanism to generate unbiased willingness to pay estimates.

Keywords: Incentive compatible mechanisms, public goods

JEL Classification: C91, H41