Mechanism Design by a Politician

TL;DR

This paper analyzes how a politician can optimally design proposals for public good provision and funding, considering private agent preferences, approval rules, and outside options, revealing complex non-monotonic and non-convex optimal solutions.

Contribution

It characterizes the optimal public-good level and coalition formation strategies in a setting with private information and approval-based decision-making, including non-monotonic and non-convex outcomes.

Findings

Optimal public-good provision can be non-monotonic in outside options.

Optimal coalitions may be non-convex sets of agent types.

The model provides a strategic framework for agenda-setting in public decisions.

Abstract

A set of agents has to make a decision about the provision of a public good and its financing. Agents have heterogeneous values for the public good and each agent's value is private information. An agenda-setter has the right to make a proposal about a public-good level and a vector of contributions. For the proposal to be approved, only the favourable votes of a subset of agents are needed. If the proposal is not approved, a type-dependent outside option is implemented. I characterize the optimal public-good provision and the coalition-formation for any outside option in dominant strategies. Optimal public-good provision might be a non-monotonic function of the outside option public-good level. Moreover, the optimal coalition might be a non-convex set of types.