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Can a raise in your wage make you worse off? A public goods perspective

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  • Suman Ghosh

    ()
    (Department of Economics, College of Business, Florida Atlantic University)

  • Alexander Karaivanov

    ()
    (Department of Economics, Simon Fraser University)

Abstract

We show that a seemingly paradoxical result is possible—an increase in one's wage can reduce one's welfare. Such outcome can occur in an economy populated by agents who value a private good bought using labor income and a public good produced by voluntary time contributions. A raise in the wage (in general, opportunity cost of time) makes each agent substitute away from contributing to the public good, failing to internalize the negative externality imposed on others. The result is a decrease in public good provision. Under quite general conditions, the implied cumulative negative effect on agents' welfare can more than offset the positive effect of the wage raise from increased private good consumption and lead to an equilibrium in which all agents are worse off. Our result is particularly relevant for developing economy settings as it holds for relatively low initial wage levels. We discuss the applicability of our findings to a number of important problems in development, such as market integration, cooperation in common pool resource conservation and social capital.

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Bibliographic Info

Paper provided by Department of Economics, College of Business, Florida Atlantic University in its series Working Papers with number 05004.

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Length: 21 pages
Date of creation: Jan 2005
Date of revision: Mar 2006
Publication status: Forthcoming in Journal of Development Economics
Handle: RePEc:fal:wpaper:05004

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Keywords: Private provision of public good; Economic development; Externalities;

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