In this paper we design a stylized version of an environment with public goods, dynamic linkages, and legislative bargaining. Our theoretical framework studies the provision of a durable public good as a modified version of Battaglini et al. (2012). We develop an experimental design that allows us to disentangle inefficiencies that would result in a one-shot world (static inefficiencies) from extra inefficiencies that emerge in an environment in which decisions in the present affect the future (dynamic inefficiencies). We solve for efficiency and also characterize the bargaining equilibrium, a symmetric stationary subgame-perfect equilibrium, which is the most common concept used in applied work. The experimental results indicate that subjects do react to dynamic linkages and, as such, we find evidence of both static and dynamic inefficiencies. In fact, the quantitative predictions of the model with respect to the share of dynamic inefficiencies are closest to the data when dynamic linkages are high. To the extent that behavior is different from what is predicted by the model, a systematic pattern emerges, namely the use of strategic cooperation whereby subjects increase the efficiency of period one proposals by selectively punishing, in period two, subjects who did not propose efficient allocations.

December 18, 2014. January, 2015. Research support from the Center for Experimental Social Science (CESS) at NYU and the Hacker Social Science Experimental Laboratory (SSEL) at Caltech is acknowledged. We thank Matan Tsur, Sevgi Yuksel for comments and research assistance. We have benefited from comments by Nels Christensen, John Kagel, Erkut Ozbay, Charlie Plott, Sergio Vicente, Christoph Vanberg, Alistair Wilson and participants at the 2012 ESA North American Meetings, 2013 workshop on Behavioral Public Economics at Vienna U., 2013 ASSA San Diego Meetings, 2013 Public Choice Society Meetings, and the 2013 Caltech Conference on Experimental Political Economy. Fréchette is grateful for financial support from the NSF, the CV Starr Center, and CESS. Palfrey is grateful for financial support in the form of grants from from NSF, the Gordon and Betty Moore Foundation, and the Russell Sage Foundation.

Accepted Version - static_and_dynamic_underinvestment.pdf