private Proposition of Public Goods, Limited Tax Deductibility, and Crowding Out

Consider a Nash equilibrium in which individuals can privately provide a public good. Standard results are that lump-sum redistributions among contributors are neutral, and that governmental contributions completely crowd out private contributions. We extend the standard model by considering the tax-deductibility of voluntary contributions, with maximum deduction allowances. Neutrality of income redistribution and perfect crowding-out of governmental provision then no longer hold. Indeed, an increase in governmental provision can induce an increase in private provision of a public good.

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