Investment in the Common Good: Free Rider Effect and the Stability of Mixed Strategy Equilibria

In the game of investment in the common good, the free rider problem can delay the stakeholders’ actions in the form of a mixed strategy equilibrium. However, it has been recently shown that the commonly known form of mixed strategy equilibria of the stochastic war of attrition is destabilized by even the slightest degree of asymmetry between the players. Such extreme instability is contrary to the widely accepted notion that a mixed strategy equilibrium is the hallmark of the war of attrition. Motivated by this quandary, we search for a mixed strategy equilibrium in a stochastic game of investment in the common good. Our results show that, despite asymmetry, a mixed strategy equilibrium exists if the model takes into account the repeated investment opportunities. This class of mixed strategy equilibria disappear only if the asymmetry is sufficiently high. Because the mixed strategy equilibrium is less efficient than pure strategy equilibria, it behooves policy makers to prevent it by promoting a sufficiently high degree of asymmetry between the stakeholders through, for example, asymmetric subsidy.

Funding: Y. Kim gratefully acknowledges the financial support from the ISM department in the Culverhouse College of Business.

Supplemental Material: The e-companion is available at https://doi.org/10.1287/opre.2022.2371.