Congestion Pricing and Welfare: An Entry Experiment
This paper reports an experiment designed to evaluate the negative externalities associated with entry into a congested activity. In each round, subjects decide whether or not to enter. Payoffs for entry decline with the number of entrants, while the payoff for exit is fixed. Observed entry rates are centered around the level that equates expected payoffs for entry and exit. There is, however, some variability in entry rates from round to round, even after 50 rounds. This entry variance reduces welfare, since higher entry imposes external costs on more people, while savings from lower entry are enjoyed by fewer people. The imposition of an optimal entry fee lowers entry and raises welfare as predicted, but the variability in entry rates continues to be a source of inefficiency. This variability is reduced if participants can observe the number of entrants at any given time prior to making their own decisions. In some sessions, participants were allowed to vote on the level of the entry fee every 10 rounds and to split the fee receipts. This voting process yielded optimal or near-optimal fee levels after a couple of meetings.
This version: February 20, 2006