Dominant Assurance Contract aka Refund Bonus Explainer

I created the dominant assurance contract aka the refund bonus mechanism in 1998–it’s a mechanism capable of producing some types of public goods privately–in recent years working with Tim Cason and Robertas Zubrickas I’ve put refund bonuses to the test in lab experiments and they work! I’ve written an accessible Refund Bonus Explainer that covers this body of work. Here’s one bit:

The dike is a public good. Once it stands, it protects everyone nearby, and a neighbor who contributed nothing cannot easily be excluded. That property is what makes it hard to finance.

Paul Samuelson defined public goods in 1954, and he was pessimistic about them. Each person does better by understating what the good is worth to him, so it is, in Samuelson’s words, “in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has.” From this he concluded that “no decentralized pricing system can serve to determine optimally these levels of collective consumption.” Public goods, on this view, are what governments are for. Refund bonuses challenge that conclusion.

Read the whole thing and here is my Rent Control Explainer.

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