The article makes the bad assumption that G[V], the distribution of individual values of the public good is common knowledge. A good entrepreneur will do market research to try and determine G[V]. But better approximations cost more. Entrepreneurs will also be biased to think their idea is good. So, it is likely that many entrepreneurs will have bad models. Most individuals will also not know G[V]. So, there is another mode to profit for the small fraction of individuals who have decent approximations of G[V]: buy contracts likely to fail.
I’m not sure how this affects the whole scheme, but I’m pretty sure it limits the size of the failure payoffs to be significantly less than the value where G[V] is common knowledge.
The assumption that Vi (the value to the i-th individual) is known to that individual is also false. The individual has less variance on their estimate than others but would need to invest resources to know Vi. I’m not sure what this error does to the contracts. I doubt it has as much effect as the common knowledge assumption.
Re: dominant assurance contracts/crowdfunding
The article makes the bad assumption that G[V], the distribution of individual values of the public good is common knowledge. A good entrepreneur will do market research to try and determine G[V]. But better approximations cost more. Entrepreneurs will also be biased to think their idea is good. So, it is likely that many entrepreneurs will have bad models. Most individuals will also not know G[V]. So, there is another mode to profit for the small fraction of individuals who have decent approximations of G[V]: buy contracts likely to fail.
I’m not sure how this affects the whole scheme, but I’m pretty sure it limits the size of the failure payoffs to be significantly less than the value where G[V] is common knowledge.
The assumption that Vi (the value to the i-th individual) is known to that individual is also false. The individual has less variance on their estimate than others but would need to invest resources to know Vi. I’m not sure what this error does to the contracts. I doubt it has as much effect as the common knowledge assumption.