Efficient public goods provision with incomplete markets

Abstract

Unsolved issues of efficient public investment in stochastic-dynamic models of the economy are examined using results from incomplete markets general equilibrium theory. The analysis delivers two previously unarticulated findings. First, the equilibrium interest rate can be used to bound the socially optimal discount rate for a public investment. Second, a new non-market mechanism (CRM) that is welfare improving over alternatives in the Groves class is introduced. The second finding amends the well-known characterization theorem of Green and Laffont (Incentives in Public Decision-Making, North-Holland, New York, 1979) and identifies a new class of direct-revelation mechanisms for public goods provision in stochastic-dynamic settings.