IDEAS home Printed from https://ideas.repec.org/a/eee/poleco/v36y2014icp1-12.html
   My bibliography  Save this article

Consuming your way to efficiency: Public goods provision through non-distortionary tax lotteries

Author

Listed:
  • Giebe, Thomas
  • Schweinzer, Paul

Abstract

We revisit the classical result that taxation of private consumption is distortionary and therefore precludes the efficient provision of public goods. We introduce a nonlinear consumption tax which we call a ‘tax lottery’. Under this scheme, an ad-valorem consumption tax is supplemented with a lottery in which consumers can win cash prizes. The winning probabilities in this lottery depend on all consumers' private good consumption decisions. We show that for a given ad-valorem tax, an appropriately designed lottery can implement an efficient allocation in pure-strategy Nash equilibrium. The lottery component corrects the distortion in private consumption due to the ad-valorem tax, while the resulting tax revenue is sufficient to efficiently provide the public good and pay out the lottery prize.

Suggested Citation

  • Giebe, Thomas & Schweinzer, Paul, 2014. "Consuming your way to efficiency: Public goods provision through non-distortionary tax lotteries," European Journal of Political Economy, Elsevier, vol. 36(C), pages 1-12.
  • Handle: RePEc:eee:poleco:v:36:y:2014:i:c:p:1-12
    DOI: 10.1016/j.ejpoleco.2014.06.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0176268014000561
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Craig Brett & John A. Weymark, 2008. "Public Good Provision And The Comparative Statics Of Optimal Nonlinear Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 49(1), pages 255-290, February.
    2. Lazear, Edward P & Rosen, Sherwin, 1981. "Rank-Order Tournaments as Optimum Labor Contracts," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 841-864, October.
    3. Luca Corazzini & Marco Faravelli & Luca Stanca, 2010. "A Prize To Give For: An Experiment on Public Good Funding Mechanisms," Economic Journal, Royal Economic Society, vol. 120(547), pages 944-967, September.
    4. N. Gregory Mankiw & Matthew Weinzierl & Danny Yagan, 2009. "Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, American Economic Association, vol. 23(4), pages 147-174, Fall.
    5. Eggert, Wolfgang & Kolmar, Martin, 2006. "Contests with size effects," European Journal of Political Economy, Elsevier, vol. 22(4), pages 989-1008, December.
    6. Benny Moldovanu & Aner Sela, 2001. "The Optimal Allocation of Prizes in Contests," American Economic Review, American Economic Association, vol. 91(3), pages 542-558, June.
    7. MONIQUE FLORENZANO & ELENA L. Del MERCATO, 2006. "Edgeworth and Lindahl–Foley equilibria of a General Equilibrium Model with Private Provision of Pure Public Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(5), pages 713-740, December.
    8. Rob Moir, 2004. "Lotteries as a funding tool for financing public goods," CEEL Working Papers 0401, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    9. Béatrice Roussillon & Paul Schweinzer, 2010. "Efficient emissions reduction," The School of Economics Discussion Paper Series 1004, Economics, The University of Manchester.
    10. Van Long, Ngo, 2013. "The theory of contests: A unified model and review of the literature," European Journal of Political Economy, Elsevier, vol. 32(C), pages 161-181.
    11. Charles T. Clotfelter & Philip J. Cook, 1989. "Selling Hope: State Lotteries in America," NBER Books, National Bureau of Economic Research, Inc, number clot89-1.
    12. Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February.
    13. Ron Siegel, 2009. "All-Pay Contests," Econometrica, Econometric Society, vol. 77(1), pages 71-92, January.
    14. Lee, Sanghack, 2007. "Contests with size effects through costs," European Journal of Political Economy, Elsevier, vol. 23(4), pages 1190-1193, December.
    15. Grossmann, Martin, 2014. "Uncertain contest success function," European Journal of Political Economy, Elsevier, vol. 33(C), pages 134-148.
    16. Franke, Jörg & Leininger, Wolfgang, 2013. "On the Efficient Provision of Public Goods by Means of Lotteries," Ruhr Economic Papers 399, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    17. Andreas Lange & John A. List & Michael K. Price, 2007. "Using Lotteries To Finance Public Goods: Theory And Experimental Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(3), pages 901-927, August.
    18. Green, Jerry R & Stokey, Nancy L, 1983. "A Comparison of Tournaments and Contracts," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 349-364, June.
    19. Buchholz, Wolfgang & Cornes, Richard & Rübbelke, Dirk, 2011. "Interior matching equilibria in a public good economy: An aggregative game approach," Journal of Public Economics, Elsevier, vol. 95(7), pages 639-645.
    20. Stergios Skaperdas, 1996. "Contest success functions (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 283-290.
    21. John O. Ledyard & Thomas R. Palfrey, 1994. "Voting and Lottery Drafts as Efficient Public Goods Mechanisms," Review of Economic Studies, Oxford University Press, vol. 61(2), pages 327-355.
    22. Bergstrom, Theodore C & Cornes, Richard C, 1983. "Independence of Allocative Efficiency from Distribution in the Theory of Public Goods," Econometrica, Econometric Society, vol. 51(6), pages 1753-1765, November.
    23. Arthur J.H.C. Schram & Sander Onderstal, 2009. "Bidding To Give: An Experimental Comparison Of Auctions For Charity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 431-457, May.
    24. Monique Florenzano & Elena L. del Mercato, 2006. "Edgeworth and Lindahl-Foley equilibria of a general equilibrium model with private provision of pure public goods," Post-Print halshs-00085726, HAL.
    25. Gordon, Roger & Li, Wei, 2009. "Tax structures in developing countries: Many puzzles and a possible explanation," Journal of Public Economics, Elsevier, vol. 93(7-8), pages 855-866, August.
    26. Myles,Gareth D., 1995. "Public Economics," Cambridge Books, Cambridge University Press, number 9780521497695.
    27. 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.
    28. repec:fgv:epgrbe:v:67:n:1:a:5 is not listed on IDEAS
    29. Junmin Wan, 2010. "The Incentive to Declare Taxes and Tax Revenue: The Lottery Receipt Experiment in China," Review of Development Economics, Wiley Blackwell, vol. 14(s1), pages 611-624, August.
    30. Monique Florenzano, 2009. "Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision ? I - The convex case," Post-Print halshs-00367867, HAL.
    31. Hao Jia, 2008. "A stochastic derivation of the ratio form of contest success functions," Public Choice, Springer, vol. 135(3), pages 125-130, June.
    32. repec:pit:wpaper:448 is not listed on IDEAS
    33. Landry, Craig E. & Price, Michael K., 2007. "Earmarking lottery proceeds for public goods: Empirical evidence from U.S. lotto expenditures," Economics Letters, Elsevier, vol. 95(3), pages 451-455, June.
    34. Henrik Orzen, 2005. "Fundraising through Competition: Evidence from the Lab," Discussion Papers 2005-04, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    35. Giebe, Thomas & Schweinzer, Paul, 2014. "Consuming your way to efficiency: Public goods provision through non-distortionary tax lotteries," European Journal of Political Economy, Elsevier, vol. 36(C), pages 1-12.
    36. Qiang Fu & Jingfeng Lu, 2012. "Micro foundations of multi-prize lottery contests: a perspective of noisy performance ranking," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(3), pages 497-517, March.
    37. John Morgan, 2000. "Financing Public Goods by Means of Lotteries," Review of Economic Studies, Oxford University Press, vol. 67(4), pages 761-784.
    38. Deaton, Angus, 1981. "Optimal Taxes and the Structure of Preferences," Econometrica, Econometric Society, vol. 49(5), pages 1245-1260, September.
    39. Bos, Olivier, 2011. "How lotteries outperform auctions," Economics Letters, Elsevier, vol. 110(3), pages 262-264, March.
    40. Martin Kolmar & Dana Sisak, 2014. "(In)efficient public-goods provision through contests," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 43(1), pages 239-259, June.
    41. Akira Maeda, 2008. "Optimal Lottery Design For Public Financing," Economic Journal, Royal Economic Society, vol. 118(532), pages 1698-1718, October.
    42. Alex Gershkov & Jianpei Li & Paul Schweinzer, 2009. "Efficient tournaments within teams," RAND Journal of Economics, RAND Corporation, vol. 40(1), pages 103-119, March.
    43. Jeffrey Carpenter & Jessica Holmes & PeterHans Matthews, 2008. "Charity auctions: a field experiment," Economic Journal, Royal Economic Society, vol. 118(525), pages 92-113, January.
    44. Monique Florenzano, 2009. "Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00531434, HAL.
    45. Monique Florenzano, 2009. "Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision? I - The convex case," Documents de travail du Centre d'Economie de la Sorbonne 09009, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    46. Bierbrauer, Felix, 2009. "A note on optimal income taxation, public goods provision and robust mechanism design," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 667-670, June.
    47. Jacob K. Goeree & Emiel Maasland & Sander Onderstal & John L. Turner, 2005. "How (Not) to Raise Money," Journal of Political Economy, University of Chicago Press, vol. 113(4), pages 897-926, August.
    48. Barry J. Nalebuff & Joseph E. Stiglitz, 1983. "Prices and Incentives: Towards a General Theory of Compensation and Competition," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 21-43, Spring.
    49. Joaquim Silvestre, 2003. "Wicksell, Lindahl and the Theory of Public Goods," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(4), pages 527-553, December.
    50. Ryvkin, Dmitry, 2010. "Contests with private costs: Beyond two players," European Journal of Political Economy, Elsevier, vol. 26(4), pages 558-567, December.
    51. Dixit, Avinash K, 1987. "Strategic Behavior in Contests," American Economic Review, American Economic Association, vol. 77(5), pages 891-898, December.
    52. Monique Florenzano, 2009. "Walras-Lindahl-Wicksell: What equilibrium concept for public goods provision," Working Papers halshs-00531434, HAL.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fabbri, Marco, 2015. "Shaping tax norms through lotteries," International Review of Law and Economics, Elsevier, vol. 44(C), pages 8-15.
    2. Bastani, Spencer & Giebe, Thomas & Gürtler, Oliver, 2019. "A general framework for studying contests," MPRA Paper 97363, University Library of Munich, Germany.
    3. Jiao, Qian & Shen, Bo & Sun, Xiang, 2019. "Bipartite conflict networks with returns to scale technology," Journal of Economic Behavior & Organization, Elsevier, vol. 163(C), pages 516-531.
    4. Lotta Björklund Larsen & Rubina Arakelyan & Teimuraz Gogsadze & Mariam Katsadze & Sophiko Skhirtladze & Nino Muench, 2019. "The Georgian Tax Lottery of 2012. A Multi-Methodological Assessment," Working Papers 009-19 JEL Codes: H26, K4, International School of Economics at TSU, Tbilisi, Republic of Georgia.
    5. Franke, Jörg & Leininger, Wolfgang, 2014. "On the efficient provision of public goods by means of biased lotteries: The two player case," Economics Letters, Elsevier, vol. 125(3), pages 436-439.

    More about this item

    Keywords

    Public goods; Contests; Taxation; Tax refunds;

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H0 - Public Economics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:poleco:v:36:y:2014:i:c:p:1-12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/505544 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.