Increasing Private Provision of Public Goods Through a Lottery Policy: An Application to Sales Tax Evasion

Abstract

The aim of this work is to explain the success registered by a zero-cost policy against sales tax evasion based on a lottery mechanism which has been recently implemented in a growing number of countries. It is suggested how the specific sales tax evasion situation in which this policy has been applied could be traced back to a general public goods framework. After a discussion of the empirical evidences showing the policy success, we propose a theoretical model incorporating Tversky and Kahneman’s (1992) Cumulative Prospect Theory insights. Furthermore, a test for verifying the applicability of the lottery ticket policy in specific contexts is developed. Such a test could represent a useful ex-ante indicator of the expected success of the lottery ticket policy for policymakers interested in increasing the private provision of public goods.