GAMBLING WITH TAX DOLLARS

Municipalities often spend money in the hopes of generating new tax revenue. Because the estimated increase in tax revenues is uncertain, these policies are essentially gambles with tax dollars. This paper shows that it is possible for a welfare-maximizing government to exhibit risk-loving behavior even though individual taxpayers are risk-averse. This risk-loving behavior may occur when the government has the option to provide an indivisible public good, such as a park. Interestingly, the poorest and wealthiest municipalities do not find gambles optimal. For communities that find gambles optimal, both the provision of the public good and tax rates are affected.