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

Juergen Huber, Martin Shubik and Shyam Sunder
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Juergen Huber: University of Innsbruck

No 1830R3, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We use a laboratory experiment to compare general equilibrium economies in which agents individually allocate their private goods among consumption, investment in production, and replenishing/ refurbishing a depreciating public facility in a dynamic game with long-term investment opportunities. The public facility is financed either by voluntary anonymous contributions (VAC) or taxes. We find that rates of taxation chosen by majority vote remain at an intermediate level (far from zero or 100%), and the experimental economies sustain public goods at levels between the finite- and infinite-horizon optima. This contrasts with a rapid decline of public goods under VAC. Both the payoff efficiency and production of private goods are higher when taxes are set endogenously instead of being fixed at the optimum level externally. When subjects choose between VAC and taxation, 23 out of 24 majority votes favor taxation.

Keywords: Public goods; Experiment; Voting; Taxation; Evolution of institutions (search for similar items in EconPapers)
JEL-codes: C72 C91 C92 G10 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2011-10, Revised 2017-06
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Published in Journal of Economic Behavior and Organization (February 2018)

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Related works:
Journal Article: Financing of public goods through taxation in a general equilibrium economy: Experimental evidence (2018)
Working Paper: Financing of Public Goods through Taxation in a General Equilibrium Economy: Experimental Evidence (2013)
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