Using Tontines to Finance Public Goods: Experimental Evidence

Abstract

Relying upon voluntary contributions for public goods provision generally results in the under-provision of the good relative to first-best levels due to the free-rider problem. Taxation/allocation schemes have been designed which solve the free-rider problem, but are too complex to implement. Lotteries and auctions are frequently used to fund public goods, as they diminish the incentive to free-ride. This thesis examines the use of a tontine to finance public goods. I will demonstrate that the tontine, a life-contingent annuity with survivorship benefits, maintains many of the properties of the single fixed-prize lottery. Additionally, I propose that the tontine outperforms the single fixed-prize lottery with symmetric, risk averse agents via some analogue of the Rothschild/Stiglitz effect. Laboratory experiments lend support to both of these conjectures. The results suggest that the tontine can be a more effective mechanism than the single fixed-prize lottery for increasing public goods provisions above voluntary levels.