Achieving Efficiency in Dynamic Contribution Games

Abstract

We analyze a game in which a group of agents exert costly effort over time to make progress on a project. The project is completed once the cumulative efforts reach a pre-specified threshold, at which point it generates a lump sum payoff. We characterize a budget balanced mechanism that induces each agent to exert the first best effort level as the outcome of a Markov Perfect Equilibrium, thus eliminating the free-rider problem. This mechanism specifies for each agent flow payments that he must make while the project is in progress, and a reward that is payable upon completion. We also show how our mechanism can be adapted to other dynamic games with externalities, such as strategic experimentation and the dynamic extraction of a common resource.

Keywords: Contribution games, dynamic games, externalities, moral hazard in teams, free- riding.

JEL Classification: C7, D7, D8, H4, M1