Can a raise in your wage make you worse off? A public goods perspective

Suman Ghosh () and Alexander Karaivanov

No 5004, Working Papers from Department of Economics, College of Business, Florida Atlantic University

Abstract: We show that a seemingly paradoxical result is possible—an increase in one's wage can reduce one's welfare. Such outcome can occur in an economy populated by agents who value a private good bought using labor income and a public good produced by voluntary time contributions. A raise in the wage (in general, opportunity cost of time) makes each agent substitute away from contributing to the public good, failing to internalize the negative externality imposed on others. The result is a decrease in public good provision. Under quite general conditions, the implied cumulative negative effect on agents' welfare can more than offset the positive effect of the wage raise from increased private good consumption and lead to an equilibrium in which all agents are worse off. Our result is particularly relevant for developing economy settings as it holds for relatively low initial wage levels. We discuss the applicability of our findings to a number of important problems in development, such as market integration, cooperation in common pool resource conservation and social capital.

Keywords: Private provision of public good; Economic development; Externalities (search for similar items in EconPapers)
JEL-codes: D62 H41 O12 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2005-01, Revised 2006-03
New Economics Papers: this item is included in nep-pbe
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Forthcoming in Journal of Development Economics

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Journal Article: Can a raise in your wage make you worse off? A public goods perspective (2007)
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