Contribution to a Public Good with Altruistic Preferences

Abstract

This paper presents a model of private provision of a public good where individuals in a group have altruistic preferences and care about the private and public good consumption of the other members of the group. I show that increasing the level of altruism increases the Nash level of the public good, demonstrating that caring about others improves public good provision. I then compare the Nash level of the public good to the benchmark level of provision by a social planner who aggregates the preferences of the group. I find that if there are non-contributors to the public good in a Nash equilibrium, income inequality can cause over-provision of the public good as compared to the planner’s benchmark. Over-provision can occur because the poorest in the society do not contribute and the richer individuals contribute to the public good as a way to improve the welfare of the poor. These results indicate that public goods cannot substitute the role of government income transfers to the poor even when individuals are altruistic if the distribution of incomes is highly unequal.