Pareto-Efficient Solutions for Shared Public Good Provision: Nash Bargaining Versus Market Exchange

We compare two mechanisms for coordinating decisions of consumer/producers of a public good: the Nash Bargaining Solution (NBS) and the Market Exchange Solution (MES), where each agent specifies her demand for and supply of the public good according to her personal exchange rate. Both mechanisms are Pareto-efficient. In our specific model with linear or quadratic benefits and quadratic costs, MES and NBS are equivalent when there are two agents. With more than two agents, the high-benefit/low-cost agents are better off under MES. We also analyze outsourcing, where agent i can pay agent j to produce the amount that agent i promised to contribute. In NBS, outsourcing is a vehicle for side-payments. In our specific model, payments from high-cost to low-cost agents and from high-benefit to low-benefit agents are lower in MES than in NBS.