This paper determines optimal public good provision mechanisms in an environment where agents are motivated by reciprocity. In a two-agent economy, we show that the standard pivot mechanism is not strategy-proof if at least one agent cares strongly enough about reciprocity. Truthful reporting maximises a player's own payoff and hence is viewed as selfish by his opponent, who retaliates by understating demand for the public good. Incentive compatibility is restored if the mechanism is implemented sequentially. When agents are asked to report their demands in turn, a high report by the first mover (he) may result in him paying an unfairly large share of the provision cost, should the second mover (she) understate her demand. Hence, truthful reporting is not judged as selfish by the second mover, who reciprocates by stating her true demand. Our results alert the institutional designer to the importance of game dynamics when agents are non-selfish.
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- Mechanism design
- Psychological game theory