State-variable public goods and social comparisons

Abstract

JEL classification: D62 H21 H23 H41 a b s t r a c tThe optimal provision of a state-variable public good, where the global climate is the prime example, is analyzed in a model where people care about their relative consumption. We consider both keeping-up-with-the-Joneses preferences (where people compare their own current consumption with others' current consumption) and catching-up-withthe-Joneses preferences (where people compare their own current consumption with others' past consumption) in an economy with two productivity types, overlapping generations, and optimal nonlinear income taxation. The extent to which the conventional rules for provision of state-variable public goods (a dynamic analog of the Samuelson rules) ought to be modified is shown to clearly depend on the strength of the relative concerns of both kinds, but also on the preference elicitation format. & 2014 The Authors. Published by Elsevier Inc. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/3.0/). IntroductionHow much should we spend to combat climate change? Naturally, the answer depends on many factors such as the links between environmental damage and abatement investments, discounting issues, and on the nature of our preferences. It also depends on how the funds for the investment are raised and on related second-best problems of the economy, including how such investments interact with the use of other policy instruments. The present paper concerns the optimal provision rule for a state-variable public good, such that the public good can be seen as a stock that changes over time, in a dynamic economy where people have positional preferences for private consumption. The latter means that people derive utility from their own private consumption relative to that of others -a notion with solid support in both questionnairebased experiments and happiness research. 1 The problem of characterizing the optimal provision of public goods under relative consumption concerns is not new in itself; it has been analyzed in a static setting with lump-sum taxes by Ng (1987), Brekke and Howarth (2002), and Aronsson and Johansson-Stenman (2014a), and in a static setting with second best taxation by Wendner and Goulder (As a consequence of using static models, all these studies have focused on cases where the public good (or bad) is a flow variable, and where the concept of relative consumption lacks a time-dimension. To our knowledge, the optimal provision of public goods under relative consumption concerns in a second-best economy has never been analyzed in a dynamic context, although Brekke and Howarth (2002), Wendner (2003), and Howarth (2006 have examined the implications of environmental externalities in dynamic models where relative consumption matters. 2 There is also a sizable literature on economic growth in models with relative consumption concerns (e.g.. Since this dynamic public good provision problem obviously is more complex than its static counterpart, one may wonder whether t...

Positional and conformist effects in voluntary public good provision

“…They conclude that marginal income tax should be higher than in the standard analysis. The analysis is extended to an overlapping-generations model in Aronsson and Johansson-Stenman (2014).…”

Genuine Saving and Positional Externalities

“…This section extends the benchmark model by analyzing the role of public investments . The implications of positional externalities for the optimal provision of public goods have been addressed in several studies (e.g., Ng, ; Aronsson and Johansson‐Stenman, , ). Relative concerns for private consumption affect the optimal policy rule for public good provision via two channels: (i) an incentive to internalize positional externalities through increased public provision (which reduces the private consumption) and (ii) an (indirect) incentive to reduce the public provision as relative consumption concerns lower the consumers’ marginal willingness to pay for public goods, ceteris paribus.…”

“…See Ng (), Brekke and Howarth (), Aronsson and Johansson‐Stenman (, ), and Wendner and Goulder (), who analyze different aspects of public good provision in economies where people are concerned with their relative consumption.…”

External Habits Formation and the Environment

“…Their main contribution is to explore tax policy consequences of non-atmospheric (agents differ in their contribution to the externality) and asymmetric consumption externalities and to examine the joint tax policy implications of relative consumption concerns and inequality-aversion. Aronsson and Johansson-Stenman (2014) examine the optimal provision of state variable public goods by taking global climate as an example in a setting where individuals are concerned by relative consumption. Goerke and Hellesheim (2013) conclude that agents under certain conditions supply more labor if they are concerned with their status than they would in an undistorted economy without relative concerns.…”