Question

Imagine a group of 10 people, each being given an initial payment of $100. Each individual is given an option to invest X amount of their $100 in an investment account and keep the rest it (100-X).

The return income of investment for each individual is 0.9 * all amount of investment by everyone. Each person receives this value regardless how much the individual themselves invested.

For example if everyone choose X=100 and invest all their money then each person gets 0.9 * (10*100) = 900.

In equilibrium, how much each individual decides to invest? And what type of good is this investment account?

0-common resource

50-public good

0-public good

50- common resource

Answer 1

In equilibrium, no one will invest anything on that account.

The reason behind this is, irrespective of what other invests, if I invest X more, I will get a return of 0.9X, thus I will incur a loss if I keep the money on that account.

Thus, in equilibrium, there will be no investment although it is not an optimal outcome.

This is a common good, the reason behind this is it is non-excludable because I can not stop someone from enjoying the benefit of the investment account. But, it is rival, as if I take the money from the investment account, the pool decreases. Thus, it is a common good.