Pre-negotiation commitment and internalization in public good provision through bilateral negotiations

• Published in: Journal of public economics Vol. 175; pp. 84 - 93
• Main Authors: Matsushima, Noriaki, Shinohara, Ryusuke
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.07.2019
• Subjects: Nash bargaining solution; Public good; Simultaneous bilateral bargaining; Supplier bargaining power; D62; D42; H41; C78; H44; Simultaneous bilateral bargaining; Nash bargaining solution; Public good; Supplier bargaining power
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2019.03.009

A profit-maximizing public good supplier endogenously determines the level of the public good and simultaneously negotiates with beneficiaries of the good one by one. A pre-negotiation commitment on the production level of the public good by the supplier enhances the internalization of beneficiaries' preferences. With the commitment, the supplier produces the public good at an efficient level in equilibrium if and only if its bargaining power is sufficiently weak. In addition, the public good is produced excessively as a result of the commitment when the supplier's bargaining power is sufficiently strong. •A profit-maximizing public good supplier negotiates with beneficiaries of the good.•The supplier commits the production level of the public good prior to negotiations.•The commitment is a useful device for supplying a large amount of the public good.•A weak supplier can provide the public good efficiently with this commitment.•The supplier credibly commits the supply level of the good prior to negotiations.