Level Of Public Good Provision Research Articles

Locational efficiency in a federal system without land rent taxation

We show that in a federal state with mobile population labor and capital income taxes do not suffice to achieve efficiency in general, but that they do suffice if the federation consists of just two types of regions. In the general case we study the resulting second-best problem and find that in the second-best optimum the level of public good provision is efficient, but neither capital nor labor is allocated efficiently.

The Time-Consistent Public Goods Provision

In this study, we reconsider the optimal nonlinear tax problem with the public good from the perspective of the commitment issue and examine how it affects the condition of the public good provision. We show that the Samuelson rule should be modified when the government cannot commit and the skill types of taxpayers are revealed in the first period. This is true even if the preference of the taxpayers is separable and additive with respect to consumption and leisure. Our analysis also shows how the lack of commitment affects the formula of the marginal cost of public funds and the level of public good provision. Our findings imply that the level of the public good may be excessive in comparison to the case where the government can commit to its tax policy.

The Social Marginal Cost Curve and a Corner Solution of the Second-Best Level of Public Good Provision: A Review and an Extension

Summary Assume that the private goods and the public good are weakly separable, the private goods are gross complements, and the private utility function is a homogeneous of degree one function with constant elasticity of substitution. We demonstrate that, under commodity taxation, the social marginal cost curve of public good provision is initially upward sloping and eventually becomes downward sloping. Moreover, the social marginal cost eventually falls below the private marginal cost. These unusual properties arise from a demand-shift effect: An increase in the tax rate raises the marginal willingness to pay for the public good since it pushes up the unit cost of private utility, hence making the public good more attractive than private goods. In other words, the supply of the public good creates its own demand when the funding to cover production costs is raised through distortionary commodity taxes. It follows that there may exist three solutions to the first-order condition for the second-best problem: two of them are interior solutions and one is a corner solution.

Bailouts and Bank Runs

This paper analyzes the effects of government bailouts in a modified Diamond-Dybvig model. Following Keister (2010), my model includes both a private good and a public good. Bailouts are assumed to crowd out pub- lic good provision and improve the ex-post allocation of resources during a bank run. I introduce two major innovations to this model. The first is the (realistic) assumption that the depositor and hence her bank takes the public good provision as given. Thus, the bank does not see the effect of its deposit contract on the level of public good provision. The wedge caused by the difference between the banks and the government's objectives results in excessive systemic risk. The second innovation is to determine the run prob- ability by using the global game approach in Goldstein and Pauzner (2005), making the run probability endogenous. Bailouts increase the ex-ante run probability through two channels. The first channel is moral hazard: Runs are less costly for banks when there are bailouts. Hence, banks take on more risk than is socially optimal. The second channel works through the change in the depositor's incentives to run: Bailouts increase the probability that a depositor will get her money if she participates in a run, thus increasing the likelihood of a run.

Public-Good Provision in Large Economies

In a large economy, a first-best provision rule for a public good is robustly implementable with budget balance because no one individual alone can affect the aggregate outcome. First-best outcomes can, however, be blocked by coalitions of agents acting in concert. With a requirement of immunity against robustly blocking coalitions, we find that, for a pubic good that come as a single indivisible unit, a monotonic social choice function cannot condition on preference intensities but only on the population shares of people favoring one outcome over another. Any such social choice function can be implemented by a simple voting mechanism. With more public-good provision levels, more complicated mechanisms are required, but they still involve the counting of votes rather than an assessment of benefits. Monotonicity and immunity against robust blocking thus provide a foundation for the use of voting mechanisms.

Majority choice of tax systems in single- and multi-jurisdictional economies

We examine majority choice of tax instruments in an economy with heterogeneous households. In our framework majority voting equilibrium exists despite the multidimensional policy choice set. We examine single and multi-jurisdictional economies. We identify five competing incentives that influence choice of tax instruments. Equilibria generally entail a mixture of tax types. With multiple jurisdictions, strong reliance on head taxation in rich communities arises to deter poorer households from immigrating, in spite of local incentives to use alternative tax instruments to redistribute wealth. If relocation costs preclude inter-community mobility, the equilibrium tax system is fundamentally affected, with redistribution incentives then dominating choice of instruments and tax rates. Limiting or eliminating head taxation fundamentally alters stratification, public good provision levels, and tax systems.

Heterogeneity and cooperation: The role of capability and valuation on public goods provision

We experimentally investigate the effects of two different sources of heterogeneity – capability and valuation – on the provision of public goods when punishment is possible or not. We find that compared to homogeneous groups, asymmetric valuations for the public good have negative effects on cooperation and its enforcement through informal sanctions. Asymmetric capabilities in providing the public good, in contrast, have a positive and stabilizing effect on voluntary contributions. The main reason for these results is the different externalities contributions have on the other group members’ payoffs affecting individuals’ willingness to cooperate. We thus provide evidence that it is not the asymmetric nature of groups per se that facilitates or impedes collective action, but that it is rather the nature of asymmetry that determines the degree of cooperation and the level of public good provision.

Stitching a Patchwork Quilt: Democracy, Social Heterogeneity, and Development Outcomes

This article investigates the manner in which the characteristics of selection institutions interact with country social context to affect development outcomes. Previous work has established that higher levels of social heterogeneity are associated with lower levels of public goods provision (Easterly and Levine, 1997; Alesina et al., 1999). Democracy tends to ameliorate these negative effects (Collier, 2000). Since democracy is a multidimensional concept, however, identifying which characteristics of democracy produce better development outcomes in diverse social contexts is important. Building upon models of probabilistic voting, this paper considers two such dimensions: contestation and inclusiveness (Dahl, 1971; Coppedge et al., 2008). Empirical tests using a time-series-cross-sectional dataset covering 146 countries indicate that political contestation matters more than inclusiveness for reducing rates of infant mortality in countries with high levels of social heterogeneity. Conversely, where levels of social heterogeneity are low, greater inclusiveness appears to reduce infant mortality.

Private provision of public good and immiserizing growth

This paper develops a simple R&D driven endogenous growth model with a public good financed by private contributions. I show that a larger endowment of population or resources can be immiserizing for the economy as a whole. With a larger population, the economy grows at a higher rate but per-capita income from asset holdings falls unambiguously. Since people voluntarily contribute a part of their instantaneous income toward the public good, reduced asset income may lead to lower level of provision of the public good. This brings in the possibility of immiserizing growth where higher rate of growth is associated with lower level of welfare. I also show that the socially optimum level of public good provision may well fall below the equilibrium level and that the problem of underprovision of the public good need not be aggravated in larger economies.

Incomplete punishment networks in public goods games: experimental evidence

Abundant evidence suggests that high levels of contributions to public goods can be sustained through self-governed monitoring and sanctioning. This experimental study investigates the effectiveness of decentralized sanctioning institutions in alternative punishment networks. Our results show that the structure of punishment network significantly affects allocations to the public good. In addition, we observe that network configurations are more important than punishment capacities for the levels of public good provision, imposed sanctions and economic efficiency. Lastly, we show that targeted revenge is a major driver of anti-social punishment.

Corruption drives the emergence of civil society

Centralized sanctioning institutions have been shown to emerge naturally through social learning, displace all other forms of punishment and lead to stable cooperation. However, this result provokes a number of questions. If centralized sanctioning is so successful, then why do many highly authoritarian states suffer from low levels of cooperation? Why do states with high levels of public good provision tend to rely more on citizen-driven peer punishment? Here, we consider how corruption influences the evolution of cooperation and punishment. Our model shows that the effectiveness of centralized punishment in promoting cooperation breaks down when some actors in the model are allowed to bribe centralized authorities. Counterintuitively, a weaker centralized authority is actually more effective because it allows peer punishment to restore cooperation in the presence of corruption. Our results provide an evolutionary rationale for why public goods provision rarely flourishes in polities that rely only on strong centralized institutions. Instead, cooperation requires both decentralized and centralized enforcement. These results help to explain why citizen participation is a fundamental necessity for policing the commons.

Ramsey, Pigou, Heterogeneous Agents, and Nonatmospheric Consumption Externalities

AbstractThis paper analyzes the effects of nonatmospheric consumption externalities on optimal commodity taxation and on the social cost and optimal levels of public good provision. A negative consumption externality, by lowering the social cost of public good provision, may require the second‐best level of public good provision to exceed the first‐best level. If those households who are most important for building up the consumption reference level respond the least to commodity taxation, the second‐best commodity tax rate may fall short of the first‐best rate. Moreover, in this case, heterogeneity may imply an equity‐efficiency tradeoff. This tradeoff is present only if the consumption externality is of the nonatmospheric type.

Oates’ decentralization theorem with imperfect household mobility

This paper studies how Oates’ trade-off between centralized and decentralized public good provision is affected by changes in households’ mobility. We show that an increase in household mobility favors centralization. This results from two effects. First, mobility increases competition between jurisdictions in the decentralized regime, resulting in lower levels of public good provision. Second, while tyranny of the majority creates a gap between social welfare in different jurisdictions in the centralized regime, mobility allows agents to move to the majority jurisdiction, raising average social welfare. Our main result is obtained in a baseline model where jurisdictions first choose taxes, and households move in response to tax levels. We show that the result is robust to changes in the objective function and the strategic variable of local governments.

Optimal Tax and Expenditure Policy with Aggregate Uncertainty

We study optimal income taxation and public-goods provision under the assumption that the cross-section distributions of productive abilities or public-goods preferences are not known a priori. A conventional Mirrleesian treatment is shown to provoke manipulations of the policy mechanism by individuals with similar interests. The analysis therefore incorporates a requirement of coalition-proofness. The main result is that increased public-goods provision is associated with a more distortionary and a more redistributive tax system. With a conventional Mirrleesian treatment, the level of public-goods provision is not related to how distortionary or redistributive the tax system is. (JEL D82, H21, H23, H41)

Public Versus Private Provision of Public Goods

AbstractIt is well known that public goods are underprovided in a static setting with voluntary contributions. Public provision—in a median voter framework with proportional taxation—generally exceeds private provision. This paper compares private and public provision of public goods in a dynamic setting. In a dynamic setting, voluntary donations can result in efficient provision. Also, majority‐rule solutions exist even when taxes are not proportional to income. At low discount factors, public provision tends to exceed private provision. As patience increases, however, private provision may exceed public provision. This occurs because many outcomes with a low level of public good provision—and potentially large targeted transfer payments to particular individuals—become sustainable under public provision. Under private provision, however, large targeted transfers are unsustainable. To finance the public good, private provision tends to result in benefit taxation, and public provision tends to result in progressive taxation.

Economies of Scope between Military and Bureaucracy and the Constitution and Composition of the Modern State and Its Conduct in Relation to War and Peace

The type of the mainstay of the military forces of a state decides the decree of economies of scope that exist among the military, the internal security establishment and, the fiscal apparatus which taxes and provides public goods. Economies of scope reduce the cost of military pursuit and other state functions. State that has greater economies of scope among its different functions is more able to financially survive the rising costs of a growing need for military capacity. The size of the internal security establishment and fiscal apparatus is affected by the extensiveness of the economies of scope that they have with the military. With economies of scope between military capacity and public goods provision, a growing need for military capacity results in an increased level of public goods provision and a higher tax rate. The share of state expenditures in the national income rises as a result, which is the well-known Wagner’s Law. An increase in the economies of scope between military capacity and public goods provision causes a declining share of military in the state budget and the economy. Autocracies have larger internal security establishment than democracies. The marginal cost of waging war is therefore lower for autocracies, given the economies of scope between internal security and external defense. Autocracies are therefore more warlike than democracies. With a higher marginal cost of waging war, democracies will engage in military conflicts only if the expected gross returns are higher. Democracies therefore only wage wars that have a good chance of victory.

Weak States and Steady States: The Dynamics of Fiscal Capacity

Investments in fiscal capacity—economic institutions for tax compliance—are an important feature of economic development. This paper develops a dynamic model to study the evolution of fiscal capacity over time. We contrast a social planner's investment path with politically feasible paths. Three types of states emerge in the long run: a common-interest state where public resources are devoted to public goods, a redistributive state where additional fiscal capacity is used for transfers, and a weak state with no transfers and a low level of public goods provision. We also present some preliminary evidence consistent with the theory. (JEL E23, E62, H23, H26, H41)

Ethnic Heterogeneity and the Private Provision of Public Goods

Theoretically, more ethnic heterogeneity may lead to higher aggregate provision of privately provided public goods if ethnic heterogeneity increases the uncertainty about the aggregate level of public good provision. Empirical results in this article, which are based on household survey data from Kampala, Uganda, show robust evidence that an increase in ethnic heterogeneity is associated with an increase in the willingness to contribute to public goods. The findings suggest that the mechanism, through which public goods are provided, that is whether they are provided publicly or privately, is important in understanding the role of ethnic diversity in public goods provision.

City size and the demand for local public goods

This paper studies how size-induced cost differences in the provision of local public goods affect the efficient level of public spending. Since public goods are non-rival in consumption, the per-capita cost of a given level of public good provision is lower in more populous jurisdictions. We show that this cost advantage gives rise to a substitution of public for private consumption and specify conditions under which the efficient level of local public expenditures per capita rises with a jurisdiction's population size.

The Ethnicity–Policy Preference Link in Sub-Saharan Africa

Scholars have begun to investigate the mechanisms that link ethnic diversity to low levels of public goods provision but have paid only minimal attention to the role of preferences for public policies. Some argue that ethnic groups hold culturally distinctive preferences for goods and policies, and that such differences impede effective policy making, but these studies provide little evidence to support this claim. Others argue that preferences do not vary systematically across ethnic groups, but again the evidence is limited. In this article, we engage in a systematic exploration of the link between ethnic identity and preferences for public policies through a series of individual and aggregated analyses of Afrobarometer survey data from 18 sub-Saharan African countries. We find that in most countries, preferences do vary based on ethnic group membership. This variation is not merely an expression of individual-level socioeconomic differences or of group-level cultural differences. Instead, we suggest that citizens use ethnicity as a group heuristic for evaluating public policies in a few predictable ways: We find more persistent disagreement about public policies between politically relevant ethnic groups and where group disparities in wealth are high.