Optimal Income Taxation and Public Good Provision with Endogenous Interest Groups

Felix Bierbrauer

Journal of Public Economic Theory, 2009, vol. 11, issue 2, pages 311-342

Abstract: This paper studies public goods provision when agents differ in earning abilities as well as preferences. Heterogeneity in skills makes redistribution desirable and generates an equity-efficiency trade-off. If tax revenues are devoted to a public good, this trade-off is affected in such a way that income transfers are less desirable. High-skilled individuals thus have an incentive to exaggerate their preferences for public goods. Analogously, low-skilled individuals lobby against public good provision. A requirement of collective incentive compatibility eliminates these biases. It implies that income transfers are increased whenever a public good is provided and are decreased otherwise. Copyright © 2009 Wiley Periodicals, Inc..

Date: 2009
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