Funding Public Goods with Prizes: An Experimental Analysis∗

This paper investigates fund-raising mechanisms based on a prize as a way to overcome free-riding in the private provision of public goods, under the assumptions of income heterogeneity and incomplete information regarding income levels. We compare experimentally the performance of a lottery, an all-pay auction and a benchmark volun-tary contribution mechanism. We find that prize-based mechanisms dominate voluntary contribution in terms of overall public good pro-vision, after accounting for the cost of the prize. Comparing the two prize-based mechanisms, contributions are significantly larger in the lottery than in the all-pay auction. Focusing on individual income types, the lottery dominates the all-pay auction throughout the in-come distribution. ∗We thank Roberto Reale for his contribution to this paper, and participants at the ESA 2006 meeting, Nottingham, for their helpful comments. We gratefully acknowledge financial support from Econometica