The consequences of a refund in threshold public games

What is it about?

A threshold public good is provided if and only if total contributions towards production of the good exceed some threshold level. For instance, if £100,000 is needed to refurbish the local community center then the £100,000 acts as the threshold. Prior evidence suggests that groups ability to efficiently provide the good may depend on whether there is a money back guarantee if contributions fall short of the threshold. In particular, it would seem that the promise of a money back guarantee encourages people to contribute because they no longer need to fear the outcome where they, say, contribute money but the community center still doesn't get refurbished. In this paper we report new experimental results that show a money back guarantee only works if potential givers have a relatively small endowment. To explain, consider an example. Let us say the community has 100 people who need to contribute, on average, £1000 towards the refurbishment. Suppose that the average resident only has around £1500 that they could realistically spend towards the refurbishment. Here the endowment of £1500 is relatively small compared to the amount needed. And, in such instances we find that a money back guarantee can make a huge difference to the likelihood of success. Indeed, without a money back guaranteed it is highly unlikely the public good will be provided. Suppose, by contrast, that the average resident has £3000 they could realistically spend on the refurbishment. Here the endowment is relatively larger and, in such instances, we find that a money back guarantee makes no difference at all. This is not to say the public good will be provided (success rates are typically around 50%) it is just that the money back guarantee makes no difference.

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Why is it important?

Our paper pinpoints when a money back guarantee is likely to be most effective in helping the provision of public goods. This could be useful, for instance, in the design of crowdfunding platforms. The smaller the gap between what people are being asked to give and the total amount of money they have available to give, the more helpful will be a money back guarantee.