Financing of Public Goods through Taxation in a General Equilibrium Economy: Theory and Experimental Evidence
We compare general equilibrium economies in which building and maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or by taxing agents on their income from private production. Agents start with an endowment of private goods and money, while the government starts with an endowment of public good and money. All private goods produced are tendered for sale in exchange for money in a sell-all market mechanism. Agents' proceeds from sale are taxed, and they individually allocate their private goods between current consumption and investment in production for the following period. The optimal levels of supply of the public good, and tax rate to sustain it over time, are defined and calculated for infinite and finite horizons. These equilibrium theoretical predications are compared to the outcomes of laboratory economies when (1) the starting public facility is either at or below the optimal level; and (2) the tax rate is either exogenously set at the optimal level, or at the median of rates proposed by individual agents. We find that the experimental economies sustain public goods at about 70-90 percent of the infinite horizon but considerably more than the finite horizon optimum. Payoffs (efficiency) is at 90 percent of the infinite horizon equilibrium level even when the rate of taxation is determined by voting. Starting conditions play only a minor role for outcomes of the economies, as efficiency and the stock of public good adjusts to about the same level irrespective of the starting level. These results contrast with rapid decline in provision of public goods under anonymous voluntary contributions, and point to the possibility that the social institution of government enforced taxation may have evolved to address the problem of under-production of public goods through anonymous voluntary contributions.
|Date of creation:||Oct 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucas, Robert Jr. & Stokey, Nancy L., 1983.
"Optimal fiscal and monetary policy in an economy without capital,"
Journal of Monetary Economics,
Elsevier, vol. 12(1), pages 55-93.
- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Geanakoplos, J. & Karatzas, I. & Shubik, M. & Sudderth, W., 2000.
"A strategic market game with active bankruptcy,"
Journal of Mathematical Economics,
Elsevier, vol. 34(3), pages 359-396, November.
- J. Geanakoplos & I. Karatzas & M. Shubik & W. Sudderth, 1999. "A Strategic Market Game with Active Bankruptcy," Working Papers 99-04-025, Santa Fe Institute.
- John Geanakoplos & Ioannis Karatzas & Martin Shubik & William D. Sudderth, 1998. "A Strategic Market Game with Active Bankruptcy," Cowles Foundation Discussion Papers 1183, Cowles Foundation for Research in Economics, Yale University.
- V. V. Chari & Patrick J. Kehoe, 2006.
"Modern Macroeconomics in Practice: How Theory Is Shaping Policy,"
Journal of Economic Perspectives,
American Economic Association, vol. 20(4), pages 3-28, Fall.
- V. V. Chari & Patrick J. Kehoe, 2006. "Modern macroeconomics in practice: how theory is shaping policy," Staff Report 376, Federal Reserve Bank of Minneapolis.
- Patrick Kehoe & Varadarajan V. Chari, 2006. "Modern Macroeconomics in Practice: How Theory is Shaping Policy," NBER Working Papers 12476, National Bureau of Economic Research, Inc.
- Fischer, Stanley, 1983. "`Optimal fiscal and monetary policy in an economy without capital' by Robert E. Lucas and Nancy L. Stokey," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 95-99.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- I. Karatzas & M. Shubik & W. Sudderth, 2006. "Production, interest, and saving in deterministic economies with additive endowments," Economic Theory, Springer, vol. 29(3), pages 525-548, November.
- Palfrey, Thomas R & Prisbrey, Jeffrey E, 1997. "Anomalous Behavior in Public Goods Experiments: How Much and Why?," American Economic Review, American Economic Association, vol. 87(5), pages 829-46, December.
- Anna Gunnthorsdottir & Daniel Houser & Kevin McCabe & Holly Ameden, 2004.
"Disposition, History and Contributions in Public Goods Experiments,"
- Gunnthorsdottir, Anna & Houser, Daniel & McCabe, Kevin, 2007. "Disposition, history and contributions in public goods experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 62(2), pages 304-315, February.
- Huber, Juergen & Shubik, Martin & Sunder, Shyam, 2007. "Three Minimal Market Institutions: Theory and Experimental Evidence," Working Papers 27, Yale University, Department of Economics.
- Martin Shubik & Eric Smith, 2005. "Fiat Money and the Natural Scale of Government," Cowles Foundation Discussion Papers 1509, Cowles Foundation for Research in Economics, Yale University.
- Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
- Ernst Fehr & Simon Gaechter, .
"Cooperation and Punishment in Public Goods Experiments,"
IEW - Working Papers
010, Institute for Empirical Research in Economics - University of Zurich.
- Simon Gachter & Ernst Fehr, 2000. "Cooperation and Punishment in Public Goods Experiments," American Economic Review, American Economic Association, vol. 90(4), pages 980-994, September.
- Ernst Fehr & Simon Gaechter, 1999. "Cooperation and Punishment in Public Goods Experiments," CESifo Working Paper Series 183, CESifo Group Munich.
- Ioannis Karatzas & Martin Shubik & William D. Sudderth, 2008. "Financial Control of a Competitive Economy without Randomness," Cowles Foundation Discussion Papers 1681, Cowles Foundation for Research in Economics, Yale University.
- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
- Stephan Kroll & Todd L. Cherry & Jason F. Shogren, 2007. "Voting, Punishment, And Public Goods," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 557-570, 07.
- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1830. 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: (Glena Ames)
If references are entirely missing, you can add them using this form.