Financing of Public Goods through Taxation in a General Equilibrium Economy: Experimental Evidence
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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.
Huber, Juergen; Shubik, Martin; and Sunder, Shyam, "Financing of Public Goods through Taxation in a General Equilibrium Economy: Experimental Evidence" (2011). Cowles Foundation Discussion Papers. 2186.