Endogenous community formation and collective provision - A procedurally fair mechanism

Abstract

A group of actors, individuals or firms, can engage in collectively providing projects which may be costly or generating revenues and which may benefit some and harm others. Based on requirements of procedural fairness, we derive a bidding mechanism determining endogenously who participates in collective provision, which projects are implemented, and the positive or negative payments due to the members as well as outsiders. The mechanism allows only for one community with more or less outsiders but not forming multiple communities. We justify procedural fairness but acknowledge that the outsider problem questions some of its desirable properties. Furthermore, we compare procedurally fair with optimal, e.g., welfaristic mechanism design (e.g. Myerson, 1979).