Using Economic Experiments to Test the Effect of Reliability Pricing and Self-Sizing on the Private Provision of a Public Good Results: The Case of Constructing Water Conveyance Infrastructure to Mitigate Water Quantity and Quality Concerns in the Sacramento-San Joaquin Delta

Public financing of public projects is becoming more difficult with growing political and financial pressure to reduce the size and scope of government action. Private provision is possible but is often doomed by under-provision. If however, market-like mechanisms could be incorporated into the solicitation of funds to finance the provision of the good, because, for example, the good is supplied stochastically and is divisible, then we would expect fewer incentives to free ride and greater efficiency in providing the public good. In a controlled computer-based economic experiment, we evaluate two market-like conditions (reliability pricing allocation and self-sizing of the good) that are designed to reduce under-provision. The results suggest that financing an infrastructure project when the delivery is allocated based on reliability pricing rather than historical allocation results in significantly greater price formation efficiency and less free riding whether the project is of a fixed size determined by external policy makers or determined endogenously by the sum of private contributions. When reliability pricing and self-sizing (endogenous) mechanism are used in combination free-riding is reduced the greatest among the tested treatments. Furthermore, and as expected, self-sizing when combined with historical allocations results in the worst level of free-riding. This setting for this treatment creates an incentive to undervalue willingness to pay since very low contributions still return positive earnings as long as enough contributions are raised for a single unit. If everyone perceives everyone else is undervaluing their contribution the incentive grows stronger and we see the greatest degree of free riding among the treatments. Lastly, the results from the analysis suggested that the rebate rule may have encouraged those with willingness to pay values less than the cost of the project to feel confident when contributing more than their willingness to pay and to do so when they faced the endogenously-sized, reliability pricing solicitation since a rebate would likely return them positive earnings. In subsequent research we would like to explore the role of the rebate rule in the effectiveness of reliability pricing and self-sizing in increasing price-formation efficiency and reduce free riding.