<p>It was established in the comments that the source of this claim is <a href="http://mason.gmu.edu/~atabarro/PrivateProvision.pdf" rel="nofollow noreferrer">Tabarrok: The private provision of public goods via dominant assurance
contracts</a> via <a href="https://en.wikipedia.org/wiki/Free-rider_problem#cite_note-9" rel="nofollow noreferrer">Wikipedia</a>.</p>

<p>Tabarrok writes</p>

<blockquote>
  <p>assume that a plain is flooding and that a dike must be built to hold back the river. It
  is known with certainty that the flood will be averted if the dike reaches 6ft.
  If the dike doesn’t reach 6ft then the river overflows and the builder’s efforts
  are wasted. Assume that the agent’s choice is binary, he can help to build the
  dike or not. <br> [...] <br>
  note that the game really consists of two distinct elements [...] Consider column one; the problem in this column is not free
  riding. [...] The problem in column one is that the agent doesn’t want to waste his effort
  in building a dike which won’t hold the river. Each agent lacks “assurance”
  that the others will contribute in the event that he contributes. <br>
  The problem in column 2 is quite different. In column two each agent
  assumes that the public good will be provided regardless of his actions. Each
  agent, therefore, wishes to “free ride” on the others. <br> [...] <br>
  <strong>The assurance problem can be overcome via an assurance contract.</strong> </p>
</blockquote>

<p>[<em>emphasis by me</em>]</p>

<p>So assurance contracts are not claimed to overcome the free riding problem.</p>

CC BY-SA 4.0
2020-06-16T10:59:26.520Z
So what is the point of DAC? What problem it solves more than a simple assurance contract? And in what sense contributing will be a "dominant" strategy?
hamid k
CC BY-SA 4.0
2020-06-16T12:12:17.757Z
@hamidk I did not claim DAC has a point, so I cannot speak to that. I pointed out that a one line Wikipedia summary is probably not a good summary. (Feel free to edit it.) If you read the paper Wikipedia refers you to, you can see that this assurance only works when there is no free-riding problem. If, after reading the paper, you still have questions, you can post those new questions as new questions.
Giskard
CC BY-SA 4.0
2020-06-16T08:15:57.343Z
2020-06-16T17:46:38.290Z
2020-06-16T17:46:38.290Z
Giskard
<p>Dominant assurance contracts don't claim to wholly solve the free rider problem. It simply claims that it attracts people who would otherwise not contribute, those who believe it will fail, which causes a higher likelihood to succeed.Those who believe it will succeed still choose not to.In an environment with perfect information contributing is the dominant strategy until its funded.
Additionally some costs exist,from fraud or project failure, so the failure bonus helps ameliorate that.Dominant exists because it is the dominant strategy in a game theory sense to contribute.</p>
<p>Within the context of Assurance contracts, assurance contracts don't take funding until all potential beneficiaries to the good have contributed, hence payoffs are for contributors and those that don't contribute are ;</p>
<pre><code>DC    C    
</code></pre>
<p>DC (0,0)(0,0)</p>
<p>C  (0,0)(90,90)</p>
<p>Now it might be that there is a small cost to contributing say -0.1 hence</p>
<pre><code>DC    C    
</code></pre>
<p>DC (0,0)(0,-.1)</p>
<p>C  (-.1,0)(90,90)</p>
<p>Hence any pessimism causes abandonment of project. A refund bonus of 1.1 turns the equation into,</p>
<pre><code>DC    C   
 
</code></pre>
<p>DC (0,0)(0,1)</p>
<p>C  (1,0)(90,90)</p>
<p>Hence you are pushed into contributing by game theory as you're up in both the failure and success scenarios.In a scenario with perfect information an entrant is incentivised to pay until it succeeds.
Now a more realistic scenario doesn't require everyone but just a large number hence the payoff might look more like 100,99 for don't contribute but everyone else does, and Bonus,0 . In Tabarokks initial idea bonuses &lt;&lt;&lt; contribution, but you can structure it in a bunch of ways, such that bonus &gt;&gt;&gt; contributions</p>
<pre><code>DC    C   
 
</code></pre>
<p>DC (0,0)(100,99)</p>
<p>C  (Bonus,0)(99,99)</p>
<p>In this scenario it doesn't make sense to not contribute because of fear that no one else does, because that's when you get a bonus, it only makes sense to do so because you're concerned it has succeded or don't want the public good in the first place
For people that don't value the public good at all their payoff is;</p>
<pre><code>DC    C        
</code></pre>
<p>DC (0,0)(0,99)</p>
<p>C  (Bonus,0)(-1,99)</p>
<p>Amusingly all people that do or don't want the public good will contribute if they think no one else will, whether right or wrong.</p>
<p>You might also fund the public good in tranches where subsequent rounds are intended to reduce the unit costs but then the payoffs look like (where k is contribution,and B is bonus)</p>
<pre><code> DC    C
</code></pre>
<p>DC (0,0),(0,B)</p>
<p>C  (B,0),(-k,-k)</p>
<p>Essentially the provision or non provision of the public good is not at issue here just he cost.</p>
<p>In experiment some choose not to contribute,although more gave to the pot overall.
You could muck with the incentive structure in any number of ways, for example by sign on prizes for early or late contributors,the last person or last group signing on getting a bonus,secret or open funding information etc</p>

CC BY-SA 4.0
2023-06-01T17:13:10.120Z
2023-06-03T11:43:29.217Z
2023-06-03T11:43:29.217Z
David Bowie
<p>Dominant assurance contract is a proposed solution to free rider problem in crowdfunding. It pays more money to payers (for example 105%) in case of failure of campaign. Is it make paying a dominant strategy? I think not.</p>

<p>Suppose a city need a road that make 100\$ benefit for each person. It costs 8000\$ and entrepreneur offers 5\$ in case of failure for every 80\$.</p>

<ul>
<li>normal strategy (paying 80\$):

<ul>
<li>in case of failure: 5\$ benefit</li>
<li>in case of success: 20\$ benefit</li>
</ul></li>
<li>free rider strategy:

<ul>
<li>in case of failure: 0\$ benefit</li>
<li>in case of success: 100\$ benefit</li>
</ul></li>
</ul>

<p>That shows a free rider can risk on the success probability (that helping does not affect it so much) and make a higher profit. Where I am wrong? Is there any additional hypothesis that dominant assurance need to work?</p>

CC BY-SA 4.0
2020-06-15T19:00:49.530Z
"*Dominant assurance contract is a proposed solution to free rider problem in crowdfunding*" Could you please link to a reference for this? Seems like the details of the statement would be important.
Giskard
CC BY-SA 4.0
2020-06-16T07:06:34.927Z
@Giskard https://en.wikipedia.org/wiki/Free-rider_problem#Assurance_contracts
If it does not want to solve the free rider problem, What problem it wants to solve?
hamid k
CC BY-SA 4.0
2020-06-16T08:08:09.127Z
Your actual source seems to be [Tabarrok: The private provision of public goods via dominant assurance
contracts](http://mason.gmu.edu/~atabarro/PrivateProvision.pdf), not its one sentence summary on Wikipedia.
Giskard
<game-theory>
How dominant assurance contract fix free rider problem?
hamid k
# How dominant assurance contract fix free rider problem?

(Asked by: username_0 on 2020-06-15)

Dominant assurance contract is a proposed solution to free rider problem in crowdfunding. It pays more money to payers (for example 105%) in case of failure of campaign. Is it make paying a dominant strategy? I think not.

Suppose a city need a road that make 100\$ benefit for each person. It costs 8000\$ and entrepreneur offers 5\$ in case of failure for every 80\$.

* normal strategy (paying 80\$):
  + in case of failure: 5\$ benefit
  + in case of success: 20\$ benefit
* free rider strategy:
  + in case of failure: 0\$ benefit
  + in case of success: 100\$ benefit

That shows a free rider can risk on the success probability (that helping does not affect it so much) and make a higher profit. Where I am wrong? Is there any additional hypothesis that dominant assurance need to work?

**Tags:** game-theory

> **Comments:**
> **username_1**: "*Dominant assurance contract is a proposed solution to free rider problem in crowdfunding*" Could you please link to a reference for this? Seems like the details of the statement would be important.  
> **username_0**: @username_1 https://en.wikipedia.org/wiki/Free-rider_problem#Assurance_contracts If it does not want to solve the free rider problem, What problem it wants to solve?  
> **username_1**: Your actual source seems to be [Tabarrok: The private provision of public goods via dominant assurance contracts](http://mason.gmu.edu/~atabarro/PrivateProvision.pdf), not its one sentence summary on Wikipedia.  

---

## 2 answers

### Answer by username_1 on 2020-06-16. Score: 1 | Accepted answer

It was established in the comments that the source of this claim is [Tabarrok: The private provision of public goods via dominant assurance
contracts](http://mason.gmu.edu/~atabarro/PrivateProvision.pdf) via [Wikipedia](https://en.wikipedia.org/wiki/Free-rider_problem#cite_note-9).

Tabarrok writes

> assume that a plain is flooding and that a dike must be built to hold back the river. It
> is known with certainty that the flood will be averted if the dike reaches 6ft.
> If the dike doesn’t reach 6ft then the river overflows and the builder’s efforts
> are wasted. Assume that the agent’s choice is binary, he can help to build the
> dike or not.   
>  [...]   
> note that the game really consists of two distinct elements [...] Consider column one; the problem in this column is not free
> riding. [...] The problem in column one is that the agent doesn’t want to waste his effort
> in building a dike which won’t hold the river. Each agent lacks “assurance”
> that the others will contribute in the event that he contributes.   
> The problem in column 2 is quite different. In column two each agent
> assumes that the public good will be provided regardless of his actions. Each
> agent, therefore, wishes to “free ride” on the others.   
>  [...]   
> **The assurance problem can be overcome via an assurance contract.**

[*emphasis by me*]

So assurance contracts are not claimed to overcome the free riding problem.

> **Comments:**
> **username_0**: So what is the point of DAC? What problem it solves more than a simple assurance contract? And in what sense contributing will be a "dominant" strategy?  
> **username_1**: @username_0 I did not claim DAC has a point, so I cannot speak to that. I pointed out that a one line Wikipedia summary is probably not a good summary. (Feel free to edit it.) If you read the paper Wikipedia refers you to, you can see that this assurance only works when there is no free-riding problem. If, after reading the paper, you still have questions, you can post those new questions as new questions.  

---

### Answer by username_2 on 2023-06-01. Score: 0

Dominant assurance contracts don't claim to wholly solve the free rider problem. It simply claims that it attracts people who would otherwise not contribute, those who believe it will fail, which causes a higher likelihood to succeed.Those who believe it will succeed still choose not to.In an environment with perfect information contributing is the dominant strategy until its funded.
Additionally some costs exist,from fraud or project failure, so the failure bonus helps ameliorate that.Dominant exists because it is the dominant strategy in a game theory sense to contribute.

Within the context of Assurance contracts, assurance contracts don't take funding until all potential beneficiaries to the good have contributed, hence payoffs are for contributors and those that don't contribute are ;

```
DC    C    

```

DC (0,0)(0,0)

C (0,0)(90,90)

Now it might be that there is a small cost to contributing say -0.1 hence

```
DC    C    

```

DC (0,0)(0,-.1)

C (-.1,0)(90,90)

Hence any pessimism causes abandonment of project. A refund bonus of 1.1 turns the equation into,

```
DC    C   
 

```

DC (0,0)(0,1)

C (1,0)(90,90)

Hence you are pushed into contributing by game theory as you're up in both the failure and success scenarios.In a scenario with perfect information an entrant is incentivised to pay until it succeeds.
Now a more realistic scenario doesn't require everyone but just a large number hence the payoff might look more like 100,99 for don't contribute but everyone else does, and Bonus,0 . In Tabarokks initial idea bonuses <<< contribution, but you can structure it in a bunch of ways, such that bonus >>> contributions

```
DC    C   
 

```

DC (0,0)(100,99)

C (Bonus,0)(99,99)

In this scenario it doesn't make sense to not contribute because of fear that no one else does, because that's when you get a bonus, it only makes sense to do so because you're concerned it has succeded or don't want the public good in the first place
For people that don't value the public good at all their payoff is;

```
DC    C        

```

DC (0,0)(0,99)

C (Bonus,0)(-1,99)

Amusingly all people that do or don't want the public good will contribute if they think no one else will, whether right or wrong.

You might also fund the public good in tranches where subsequent rounds are intended to reduce the unit costs but then the payoffs look like (where k is contribution,and B is bonus)

```
 DC    C

```

DC (0,0),(0,B)

C (B,0),(-k,-k)

Essentially the provision or non provision of the public good is not at issue here just he cost.

In experiment some choose not to contribute,although more gave to the pot overall.
You could muck with the incentive structure in any number of ways, for example by sign on prizes for early or late contributors,the last person or last group signing on getting a bonus,secret or open funding information etc


---

