Two-tier public provision: Comparing public systems

Christoph Lülfesmann and Gordon Myers

Journal of Public Economics, 2011, vol. 95, issue 11, 1263-1271

Abstract: The paper considers a two-tier institution in which government provides public services, but individuals can opt out of public provision (but not taxes). Funding for the public service is chosen endogenously by majority vote, and we first provide necessary and sufficient conditions for a majority vote equilibrium. In line with existing results, the equilibrium tax rate usually falls below the one found in a one-tier system (opting out of public consumption is prohibited) as the public system loses the political support of the rich who exit. We prove that when the two-tier system majority dominates a purely private system, a majority in society always welcomes a transition from a one-tier public system to a two-tier system, it is the only system that is stable in an evolutionary sense. Otherwise, a majority consisting of the middle class may be in favor of staying in a one-tier system (prohibiting exit) because of a slippery slope argument.

Keywords: Publicly provided goods; Two-tier system; Exit option; Welfare (search for similar items in EconPapers)
JEL-codes: D02 D72 H42 H51 H52 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:95:y:2011:i:11:p:1263-1271

DOI: 10.1016/j.jpubeco.2010.08.002

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