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Abstract:
This paper presents a model of private provision of a public good where individuals have altruistic preferences and care about the private and public good consumption of the other members of their group. I compare the Nash level of the public good to the benchmark level of provision by a social planner who aggregates the preferences of group members. I find that income inequality can cause overprovision of the public good as compared to the planner's benchmark. To understand overprovision, I examine a second model where, in addition to contributing to the public good, members can give private transfers of income to other members they care about. The Nash equilibrium of the model with transfers is found to be closely connected to the equilibrium of the model without transfers. Overprovision can occur in the model without transfers because the richer individuals contribute to the public good as a way to improve the welfare of the poor (noncontributors to the public good) in the absence of private transfers. These results indicate that public goods cannot substitute the role of income transfers to the poor, even when individuals are altruistic, if there is extreme income inequality.
