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Optimal Democratic Mechanisms for Taxation and Public Good Provision

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  • Felix Bierbrauer

    ()
    (Max Planck Institute for Research on Collective Goods, Bonn)

  • Marco Sahm

    (University of Munich)

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    Abstract

    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.

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    Bibliographic Info

    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2008_09.

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    Length: 37 pages
    Date of creation: Mar 2008
    Date of revision:
    Handle: RePEc:mpg:wpaper:2008_9

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    Keywords: Public goods; optimal taxation; two-dimensional heterogeneity; asymmetric information;

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    References

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    1. Weymark, John A, 1987. "Comparative Static Properties of Optimal Nonlinear Income Taxes," Econometrica, Econometric Society, vol. 55(5), pages 1165-85, September.
    2. Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February.
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    4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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    8. Neeman, Z., 1998. "The Relevance of Private Infromation in Mechanism Design," Papers 93, Boston University - Department of Economics.
    9. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
    10. Piketty, Thomas, 1999. "The information-aggregation approach to political institutions," European Economic Review, Elsevier, vol. 43(4-6), pages 791-800, April.
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    14. Gersbach, Hans, 2005. "Democratic Mechanisms: Double Majority Rules and Flexible Agenda Costs," CEPR Discussion Papers 5013, C.E.P.R. Discussion Papers.
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    21. Meirowitz, Adam, 2005. "Polling games and information revelation in the Downsian framework," Games and Economic Behavior, Elsevier, vol. 51(2), pages 464-489, May.
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    Cited by:
    1. Bierbrauer, Felix & Sahm, Marco, 2010. "Optimal democratic mechanisms for taxation and public good provision," Journal of Public Economics, Elsevier, vol. 94(7-8), pages 453-466, August.

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