Voluntary Contribution Mechanism
In this subsection we analyze alternative institutions for deciding on the provision and financing of the public good. The conventional experiment conducted to analyze decision making in the presence of public goods is the Voluntary Contribution Mechanism (VCM). It gives some insight to the question why are the public goods commonly provided by government, rather than private firms.
The Choice Environment
Within the VCM game individuals are given an endowment of tokens and they must decide how many tokens they wish to contribute toward the provision of the public good. Their payoff in the VCM game is determined as follows:
Payoff(i) = a*E(i) - c(i) + (b/N)*(Total Contributions)
where a is the return per a token retained by the individual, E(i) is the endowment given to subject i, c(i) is subject i's contribution toward the public good, (b/N) is the portion of the total contributions made toward the public good that subject i recieves back, with Total Contributions being the sum of all the contributions. To analyze the presence of "free riding," the [LINKunderrevalation of demand], it is often assumed that a < b, but that it is Pareto Optimal for everyone to contribute their entire endowment because [(b/N)*(Total Contributions = Total Endowments)] > a.
VCM Scenario Example
For an illustration, suppose the following experimental scenario:
Using the VCM mechanism it has been shown that when one increases the group size participating in the experiment the amount of "free riding" increases. In addition,a reduction in the marginal return from contributing to the public good will also increase the amount of "free riding" present (Isaac and Walker, 1988). For more interesting experimental findings using the VCM mechanism go to Experimental Research on Public Goods subsection.
Charles Holt and Susan Laury have created a simple VCM game that can be implemented within the classroom to illustrate the presence of "free riding" (Holt and Laury, 1997.) To conduct this experiment in class see the instructions titled, 'Classroom VCM Game' in the Classroom Experiments on Public Goods section or in the online resources option.
For a computerized version of the Voluntary Contributions Mechanism game go to Charles Holt?s VCM software.