Incentivizing group investments: Surplus sharing agreements in theory and experiment

A better understanding of surplus sharing is crucial for improving collective action outcomes in investment contexts where individual decisions yield group-level results. This study explores how surplus sharing agreements affect total contribution levels in such environments. We first develop a theoretical framework and then examine its implications through an incentivized laboratory experiment. Our main result shows that a pre-commitment to allocating positive surpluses proportionally and negative surpluses according to a fixed ratio leads to significantly higher total contributions than allocating surpluses solely either proportionally or by a fixed ratio. Furthermore, total contributions under the purely proportional and the purely fixed sharing agreements do not differ significantly. Finally, the degree of inequality embedded in a fixed share allocation does not significantly affect total contribution levels.