An Incomplete Contract Perspective on Public Good Provision
32 Pages Posted: 21 Mar 2005
This paper surveys what can be learned from recent advances in the incomplete contract literature to understand how public goods are or should be provided. The paper starts with a section on the full information case that presents and discusses the classical Samuelson condition on the optimal provision of public goods. The rest of the paper presents results under asymmetric information. It is constituted of two main parts. In the first one, the social planner has complete contracting ability. We discuss the basic setting and assumptions of this comprehensive contracting approach and study the trade-offs it generates. The second part of the paper is devoted to the study of contracting incompleteness. Such incompleteness can emerge from various sources, which we present and discuss. We then study the case of a politically chosen decision-maker and the consequences of its inability to commit for more than one period and of the ability for individuals to form groups. Finally, we address the problem of the choice between public and private forms of public good provision. The concluding section summarizes the main policy lessons.
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