A Virtuous Circle of Governance Contests with Externalities

• Main Authors: Sung-Hoon Park, Jason F. Shogren
• Format: Article
• Language: English
• Published: MDPI AG 2021-07-01
• Series: Sustainability
• Subjects: expected payoff; externality; governance contest; rent dissipation; virtuous circle
• Online Access: https://www.mdpi.com/2071-1050/13/14/7766

Governments create contests to allocate resources to stakeholders, e.g., grants, contracts. The actions of these stakeholders can generate a positive externality for themselves—the contest winner can attract additional outside funding and donations from third-parties who want to jump on the winner’s bandwagon. Herein we examine the externalities arising from these contests created by governance and their impact on a virtuous circle of governance contests. Among various conditions that make governance virtuous, we focus on the equilibrium expected payoffs of stakeholders, the difference in them, and the rent-dissipation rates. Our study shows that the impact of externalities on the efficiency of governance depends on two key factors: (i) the choice of <i>governance contests</i>, the player-externality and the winner-externality, and (ii) the relative efficiency of stakeholders’ efforts.