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

51 Pages Posted: 3 Jun 2017

See all articles by Juergen Huber

Juergen Huber

University of Innsbruck; University of Vienna - Department of Finance

Martin Shubik

Yale University - School of Management; Yale University - Cowles Foundation

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2017

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

JEL Classification: C72, C91, C92, G10

Suggested Citation

Huber, Juergen and Shubik, Martin and Sunder, Shyam, Financing of Public Goods through Taxation in a General Equilibrium Economy: Experimental Evidence (June 1, 2017). Cowles Foundation Discussion Paper No. 1830R3. Available at SSRN: https://ssrn.com/abstract=2978802 or http://dx.doi.org/10.2139/ssrn.2978802

Juergen Huber

University of Innsbruck ( email )

Universit├Ątsstra├če 15
Innsbruck, Innsbruck 6020
Austria

University of Vienna - Department of Finance ( email )

Bruenner Strasse 72
Vienna, 1210
Austria

Martin Shubik

Yale University - School of Management ( email )

Box 208200
New Haven, CT 06520-8200
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3694 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://cowles.econ.yale.edu/P/au/d_shubik.htm

Shyam Sunder (Contact Author)

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

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