Optimal democratic mechanisms for taxation and public good provision

We study the interdependence of optimal tax and expenditure policies. An optimal policy requires that information on preferences is made available. We first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system. We then study democratic mechanisms with the property that tax payers vote over public goods. Under such a mechanism, efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases.     

Public Versus Private Provision of Public Goods

It 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.     

Global public goods and unilateral matching mechanisms

While conventional agreements on international public goods require bilateral or multilateral cooperation, we show that unilateral action through matching mechanisms with a self‐commitment device can possibly generate Pareto‐improving outcomes. Even without commitment, unilateral matching may also benefit both players at corner situations. We further characterize the conditions under which this desirable outcome is achieved, particularly highlighting the role of the income distribution and its interplay with the preferences. Moreover, we propose a variant of unilateral matching that can generate Pareto‐improving outcomes regardless of the preferences and the income distribution, indicating that income inequality may not be an obstacle for improving public good provision through unilateral matching.     

Foreign aid and weakest-link international public goods: An experimental study

In this paper, we investigate efficiency differences between income and in-kind transfers as distribution mechanisms of foreign aid to weakest-link international public goods in a laboratory environment. We find that if there is relatively small difference in country size, then income transfers seem to provide a higher provision of the international public good, and thus higher overall welfare level than that of in-kind transfers. However, if there is a large disparity in country size, then in-kind transfers appear to provide a higher level of IPG provision and higher accompanying global welfare.     

公共品供给的实验研究 及其未来可能的进展

传统经济学基于理性“经济人”基础,认为公地悲剧问题是个体理性选择的必然结果,公共品供给需采取与个体真实公共品偏好相兼容的激励机制,并由政府承担供给角色。实验经济学研究则提供个体异质社会偏好的稳健性证据,并在合适的惩罚、沟通交流和声誉等机制下提供诸多可以实现公共品自愿供给的实验证据,表明群体或自愿组织也可作为公共品供给主体。这些公共品实验研究为现实公共治理创新提供更为科学的偏好基础和公共治理思路。     

Optimal tax treatment of private contributions for public goods with and without warm glow preferences

Tax-favored contributions for financing some public goods may be a useful part of optimal nonlinear income tax and expenditure policy. There are two sides to the potential gain from subsidized donations. First, for a given level of public good provision, higher private donations from high earners than low earners eases the incentive compatibility constraint for donors and so can raise social welfare. This follows since considering a lower-paid job includes a perception of a drop in public good provision. Second, private donation reduces consumption, easing the resource constraint. This paper explores optimal policy, using first a model with standard preferences and then a model with a warm glow of giving. In addition to showing the conditions for the level of public goods, the paper considers the pattern of optimal subsidization across earnings levels. Analysis of optimal taxation with warm glow preferences is sensitive to the choice of preferences that are relevant for a social welfare evaluation. After considering optimal rules with formulations of social welfare which do and do not include warm glow utility, the paper considers the choice of normative criterion. Like the earlier literature, this paper assumes that organizing private donations is costless while tax collection has a deadweight burden. Since private charitable fundraising is very far from costless, the paper is an exploration of economic mechanisms, not a direct guide to policy.     

Multinational public goods provision under multilateral income transfers and productivity differences

This article examines multinational public goods provision under multilateral income transfers and productivity differences across countries. Under a planner who uses linear approximation for utility maximization, we show that (1) a country is an income receiver if it has a higher productivity than the average in producing public goods, enabling it to provide more public goods; (2) the amount of transfers can be pinned down for all countries with an adjustment cost; (3) each country obtains an identical utility increment; and (4) the country with the lowest adjustment cost is the best candidate for the planner country. All results are derived based on well-known information regarding the cost of producing the public goods and income levels.     

Observable preferences for public goods

This paper discusses the circumstances under which it is possible to use the market or aggregate demand functions generated from individual utility maximization to obtain consumers' preferences for certain classes of public goods, and thus obtain the information needed to satisfy the Samuelsonian efficiency conditions for these public goods. The restrictions on the preferences of all consumers which are sufficient to use the aggregate demand function are: (i) there exists a price vector such that the level of public good provisiion is valueless, and (ii) the marginal rate of substitution of the private good price for the level of public good provision is independent of income.     

THE OPTIMAL DIVISION OF GOVERNMENT EXPENDITURE BETWEEN PUBLIC GOODS AND TRANSFER PAYMENTS

This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government's budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the arithmetic mean wage, and of the tax rate. Reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods, because of adverse incentive effects.     

The purity of impure public goods

In this paper, we provide a new perspective on the links between the analysis of the voluntary provision of pure and impure public goods. In particular, it is shown that the impure public good model can be transformed into a pure public good one. This innovative method not only leads to new comparative statics results, but also provides new insights on the impure public good model, for example, on causes of the nonneutrality of income transfers with regard to Nash equilibria in the impure public good case.     

Free‐Riding and the Provision of Public Goods in the Family: A Laboratory Experiment*

We examine the provision of family public goods using experimental economics methods. With sufficient altruism and shared resource arrangements, families can provide the efficient level of family public goods. Becker's Rotten Kid Theorem asserts that transfers from altruistic parents will induce children to maximize family income even if children are not altruistic toward other family members. Consistent with altruism, parents and children contributed more to a public good when in groups with family members than when in groups with strangers. In contrast to the predictions of the Rotten Kid Theorem, however, children's behavior fell short of maximizing family income.     

Asymmetric Decentralization,Intergovernmental Transfers,and Expenditure Policies of Local Governments

Although China’s asymmetric fiscal decentralization system has been criticized for many years, there have been few studies giving direct evidence of its negative incentives on local government spending policies. By introducing the mechanism of asymmetric decentralization and fiscal transfers to the objective function of local government, this paper studies the incentive effects of asymmetric decentralization and fiscal transfers on spending policies of local governments, and uses the provincial panel data to carry out an empirical test. The conclusion shows that the asymmetric decentralization significantly weakens the incentives of local government to increase social expenditure, and as a solution to asymmetric decentralization, fiscal transfers fail to play a good role. Due to the relatively large income effect, the financing mechanism of fiscal transfers not only significantly reduces the incentives of local government to provide social public goods, but also weakens the constraint effect of fiscal competition on expenditure policies of local governments because of the increase in the relative cost. Although the distribution mechanism of fiscal transfers has a significant positive incentive to local government in regions where the net inflow of fiscal resources is more than zero, because of common pooling effects, the comprehensive effects of fiscal transfers in the distribution of incentives of local governments to provide social public goods are negative in all regions.     

Imperfect Tax Compliance and the Optimal Provision of Public Goods

Our aim in this paper is to investigate whether the presence of imperfect income tax compliance affects the optimal provision of public goods within a framework in which public expenditure is financed by a general income tax that also accomplishes redistributive goals. We first derive the income tax structure, and then a generalized Samuelson rule. We argue that, under imperfect income tax compliance, it is desirable to distort public–good supply downwards, in the sense that the sum of marginal rates of substitution between public and private consumption must exceed their marginal rate of transformation.     

Toward an efficiency rationale for the public provision of private goods

Public provision of a private goods is justified on efficiency grounds in a model with no redistributive preferences. A government’s involvement in the provision of a private good generates information about preferences that facilitates more efficient revenue extraction for the provision of public goods. Public provision of the private good improves economic efficiency under a condition that is always fulfilled under independence and satisfied for an open set of joint distributions. The efficiency gains require that consumers cannot arbitrage the publicly provided private good, so our analysis applies to private goods where it is easy to keep track of the ultimate user, such as schooling and health care, but not to easily tradable consumer goods.     

Taxes or Fees? The Political Economy of Providing Excludable Public Goods

This paper provides a positive analysis of public provision of excludable public goods financed by uniform taxes or fees. Individuals differing in preferences decide, using majority rule, the provision level and financing instrument. The decisive voter has median preferences in a tax regime, but generally has above median preferences in a fee regime. Numerical solutions indicate that populations with uniform or left‐skewed distributions of preferences choose taxes, while a majority coalition of high‐ and low‐preference individuals prefer fees when preferences are sufficiently right skewed. Public good provision and welfare under fees exceeds that under taxes in the latter case.     

An Experimental Investigation of Excludable Public Goods

This paper extends the research on incentive compatible institutions for the provision of public goods by imposing a minimum contribution that must be met in order for an individual to enjoy the benefits of the public good. Excluding individuals who do not contribute at least the minimum transforms the linear n-player pure public goods game to an n-player coordination game with multiple, Pareto-ranked Nash equilibria. The experimental results show that exclusion increases contributions to the public good in most cases. However, an increase in contributions may not be sufficient to increase social welfare because there is a welfare cost to excluding individuals when the good is non-rival. Furthermore, exclusion can decrease both contributions and welfare in environments in which individuals fail to coordinate their contributions. The results are sensitive to the minimum contribution requirement and to the relative returns from the public and private alternatives.     

Heterogeneous preferences and in-kind redistribution: Theory and evidence

This paper examines the impact of social heterogeneity on in-kind redistribution. We contribute to the previous literature in two ways: we consider (i) the provision of several public goods and (ii) agents different not only in income, but also in their preferences over the various goods provided by the public sector. In this setting, both the distribution and size of goods provision depend on the heterogeneity of preferences. Our main result is that preference heterogeneity tends to decrease in-kind redistribution, while income inequality tends to increase it. An empirical investigation based on United States Census Bureau data confirms these theoretical findings.     

On the evolution of conditional cooperation

A long series of laboratory and field experiments, as well as conventional empirical studies, has established that (1) individuals voluntarily provide themselves with public goods at levels exceeding those predicted by the Nash voluntary contributions mechanism, and (2) agents reciprocate increases in the contributions of their counterparts in such settings (conditional cooperation). This paper presents a simple model of the evolution of preferences for conditional cooperation in the presence of a public good, which explains these two empirical findings without employing reputational or group selection arguments. In this model, individuals inherit preferences to match other agents' contributions to the provision of a public good, at some specified “matching rate.” Agents whose preferences induce them to be relatively successful – in material terms – increase in number, from one generation to the next. Under complete information and with randomly matched groups of N agents who have quasilinear preferences over the public good and a private good, the unique evolutionarily stable matching rate is 1, leading to Pareto optimal voluntary provision of the public good, regardless of group size N. The evolutionarily stable matching rate can be viewed as an endogenous social norm.     

Group size paradox and public goods

In an economy with voluntarily provided public goods and private product varieties, and a general class of CES preferences, it is shown that aggregate public good contribution follows an inverted-U pattern with respect to group size when private and public goods are substitutable in preferences. With complementarity, however, aggregate provision grows monotonically with group size.     

Optimal Provision of Public Goods: A Synthesis*

The standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns. A new approach neutralizes distributional concerns by adjusting the income tax schedule. We demonstrate that both approaches are derived from the same basic formula. We also take the new approach further by deriving an intuitive formula for the optimal level of public goods, without imposing strong assumptions on preferences. This formula shows that distortionary taxation has a role to play, as in the standard approach. However, the main determinants of optimal provision are different, and the modified Samuelson rule is likely to lead to underprovision.