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Financing of Public Goods through Taxation in a General Equilibrium Economy: Experimental Evidence

We compare laboratory general equilibrium economies in which maintenance of a depreciating public facility is financed either by anonymous voluntary contributions or taxes. Agents individually allocate their private goods between consumption and investment in production. The experimental economies sustain public goods at 80-90 percent of the infinite horizon but 25-30 percent above the finite horizon optimum. Payoff efficiency is around 90 percent. This contrasts with rapid decline of public goods under voluntary contributions. When subjects have the choice between a system with voluntary contributions or taxation, 23 out of 24 voting decisions favor taxation. Taxation appears to be superior on grounds of both long run efficiency and fairness. Economy is too complex for subjects to solve for optimally, but simple institutional constraints yield aggregate efficiency.

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File URL: http://cowles.econ.yale.edu/P/cd/d18a/d1830-r.pdf
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Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1830R.

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Length: 39 pages
Date of creation: Oct 2011
Date of revision: Apr 2013
Handle: RePEc:cwl:cwldpp:1830r
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Web page: http://cowles.econ.yale.edu/

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Order Information: Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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  1. Anna Gunnthorsdottir & Daniel Houser & Kevin McCabe & Holly Ameden, 2004. "Disposition, History and Contributions in Public Goods Experiments," Experimental 0401001, EconWPA.
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  9. Ioannis Karatzas & Martin Shubik & William D. Sudderth, 2011. "Financial Control of a Competitive Economy with Public Goods but Without Randomness," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(4), pages 503-537, 08.
  10. Panos Hatzipanayotou & Michael S. Michael, 2001. "Public Goods, Tax Policies, and Unemployment in LDCs," Southern Economic Journal, Southern Economic Association, vol. 68(1), pages 107-119, July.
  11. 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.
  12. 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.
  13. Walker, James M, et al, 2000. "Collective Choice in the Commons: Experimental Results on Proposed Allocation Rules and Votes," Economic Journal, Royal Economic Society, vol. 110(460), pages 212-34, January.
  14. 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.
  15. 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.
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