On the Neutrality of Redistribution in a General Equilibrium Model with Public Goods

Abstract

Models on private provision of public goods typically involve a single private good and linear production technology for the public good. We study a model with several private goods and non-linear (strictly concave) production technology. We revisit the question of "neutrality" of government interventions on equilibrium outcomes and show that relative price effects that are absent with a single private good and linear production technology become a powerful channel of redistribution in this case. Contrary to previous results, redistributing endowments in favor of contributors is shown to be neither necessary nor sufficient for increasing the equilibrium level of public good. * We would like to thank Svetlana Boyarchenko, David Cass, Julio Davila, George Mailath, Steve Matthews, Nicola Persico, and Andrew Postlewaite for helpful discussions and comments. We would also like to thank the participants at the Warwick Summer Research Workshop 2001, where this paper was presented, for helpful comments. An associate editor and anonymous referees provided helpful comments and helped to significantly improve the presentation of our results, for which we are very grateful. Forthcoming in Journal of Public Economic TheoryRunning Head: On the Neutrality of Redistribution Abstract: Models on private provision of public goods typically involve a single private good and linear production technology for the public good. We study a model with several private goods and non-linear (strictly concave) production technology. We revisit the question of "neutrality" of government interventions on equilibrium outcomes and show that relative price effects that are absent with a single private good and linear production technology become a powerful channel of redistribution in this case. Contrary to previous results, redistributing endowments in favor of contributors is shown to be neither necessary nor sufficient for increasing the equilibrium level of public good. JEL classification numbers: D51, H41

On neutrality with multiple private and public goods

“…However, if redistributions involving a numeraire private good are only among contributors to the unique public good, we obtain the neutrality result of Theorem 5 of Villanacci and Zenginobuz (2007).…”

“…This is an analogue of Walrasian equilibrium with private provision of a public good; prices for private goods are Walrasian and individual contributions to public good provision have the property that, in equilibrium, no consumer can benefit by changing his provision. The importance of the one-private-good assumption of Warr and BBV is highlighted by the work of Villanacci and Zenginobuz (2006b, 2007, 2012, which addresses related issues considering multiple private commodities and one public good. They obtain, under a strictly concave production technology assumption, nonneutrality results within several scenarios.…”

“…Many other authors have studied existence of equilibrium and Warr's neutrality result in a variety of contexts; see, for example, Kemp (1984), Itaya et al (2002), Cornes and Itaya (2010), Silvestre (2012), Allouch (2015) Villanacci and Zenginobuz (2006b) show a non-neutrality result (in terms of utilities) even when all households are strict contributors to the public good. To obtain further non-neutrality results, Villanacci and Zenginobuz (2007) consider redistributions of one of the multiple private goods, which is treated as numeraire, among contributors and non-contributors, to the production of the single public good.…”

Bergstrom, Blume, and Varian: Voluntary contributions and neutrality

“…These observations about relative price changes are formalized in a series of papers by Villanacci and Zenginobuz (). They consider an economy with several private goods and a finite set of firms producing one public good, which is privately financed, with nonlinear production technologies described by strictly concave transformation functions.…”

Tradeoffs of foreign assistance for the weakest-link global public goods

“…Cornes and Sandler 1996;Itaya et al 1997;Baland and Platteau 1997;Baland et al 2007; Bardhan et al 2007;Villanacci and Zenginobuz 2007). Since Warr (1983) and Bergstrom et al (1986), income inequality is known to be completely neutralized if an equilibrium is interior; the provision of public good is constant in inequality.…”