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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 1830RR, 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 maintenance of a depreciating public facility. 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, converging neither to zero nor to 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 voluntary anonymous contributions (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. 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)
Date: 2011-10, Revised 2015-07
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