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

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  • Ghosh, Suman
  • Karaivanov, Alexander

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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  • Ghosh, Suman & Karaivanov, Alexander, 2007. "Can a raise in your wage make you worse off? A public goods perspective," Journal of Development Economics, Elsevier, vol. 84(1), pages 551-571, September.
  • Handle: RePEc:eee:deveco:v:84:y:2007:i:1:p:551-571
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    Cited by:

    1. Debasis Mondal, 2015. "Private provision of public good and immiserizing growth," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(1), pages 29-49, June.
    2. Choy, James P., 2016. "Religion and the Family: The Case of the Amish," CAGE Online Working Paper Series 267, Competitive Advantage in the Global Economy (CAGE).
    3. Choy, James, 2016. "Religion and the Family: The Case of the Amish," The Warwick Economics Research Paper Series (TWERPS) 1114, University of Warwick, Department of Economics.

    More about this item

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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