Lecture Notes: Public Economics - University of Pennsylvania

Lecture Notes: Public Economics

Fall 2018

Contents

I Public Goods

6

0.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

0.1.1 What are Public Goods? . . . . . . . . . . . . . . . . . . . . . . . . . 7

0.2 The Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

0.3 Optimal Provision of Pure Public Good . . . . . . . . . . . . . . . . . . . . 8

0.4 Can the Optimal Allocation be Decentralized? . . . . . . . . . . . . . . . . 12

0.5 Lindahl Equilibria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

0.5.1 Is Lindahl Equilibrium a Reasonable Market Mechanism? . . . . . . 16

0.5.2 Nash Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . 20

0.6 Positive Models of Private Provision of Public Goods . . . . . . . . . . . . . 23

0.6.1 A Static Model of Private Contributions . . . . . . . . . . . . . . . . 24

0.6.2 Comparative Statics Regarding Changes in the Wealth Distribution 30

0.6.3 Multiple Public Goods and Spheres of Inuence . . . . . . . . . . . . 32

0.7 Does Public Provision Crowd Out Private Provision? . . . . . . . . . . . . . 33

0.7.1 Guide to the Recent Literature . . . . . . . . . . . . . . . . . . . . . 34

0.8 Dynamic Voluntary Provision of Public Goods . . . . . . . . . . . . . . . . 40

0.8.1 Admati and Perry (ReStud, 1991) . . . . . . . . . . . . . . . . . . . 40

0.8.2 Marx and Matthews (ReStud 2000) . . . . . . . . . . . . . . . . . . 44

0.9 Provision of Public Goods with Private Information . . . . . . . . . . . . . 46

0.9.1 An Illustrative Example: two agent case . . . . . . . . . . . . . . . . 46

0.9.2 Impossibility Result for Large Economies (Mailath and Postlewaite,

REStud (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

0.10 Local Public Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

0.10.1 A Class of Tiebout Models (Bewley Econometrica 1981) . . . . . . . 52

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0.10.2 Are Tiebout Equilibria Pareto E? cient? . . . . . . . . . . . . . . . . 54 0.10.3 A Tiebout Model with E? cient Equilibrium . . . . . . . . . . . . . . 57 0.10.4 Empirical Studies Related to Tiebout Hypothesis . . . . . . . . . . . 60 0.11 Public Goods Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

II Social Arrangements

63

0.12 A model incorporating social arrangements: . . . . . . . . . . . . . . . . . . 64

0.12.1 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

0.12.2 Related empirical work . . . . . . . . . . . . . . . . . . . . . . . . . 70

0.13 Applications of concern for rank . . . . . . . . . . . . . . . . . . . . . . . . 71

0.13.1 E?ort choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

0.13.2 Conspicuous consumption . . . . . . . . . . . . . . . . . . . . . . . . 72

0.13.3 Investment: "Investment and concern for relative position,"(with H.

Cole and G. Mailath) Review of Economic Design 6, 241?261 (2001). 75 0.14 Social Assets Mailath and Postlewaite IER (2006) . . . . . . . . . . . . . . 77

0.14.1 Model: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 0.14.2 Social Arrangements Bibliography . . . . . . . . . . . . . . . . . . . 82

III Public Choice (Silverman)

90

0.15 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

0.16 Models of Political Competition . . . . . . . . . . . . . . . . . . . . . . . . . 91

0.16.1 The Downsian Model of Political Competition . . . . . . . . . . . . 91

0.16.2 Criticisms and Weaknesses with the Downsian Model . . . . . . . . 94

0.16.3 Probabilistic Voting Models (minor footnote) . . . . . . . . . . . . . 94

0.16.4 Supermajorities (interesting footnote) . . . . . . . . . . . . . . . . . 96

0.16.5 Citizen Candidates (important class of models) . . . . . . . . . . . . 97

0.16.6 Equilibrium in Citizen Candidate Model . . . . . . . . . . . . . . . . 98

0.17 Comparing Political Institutions . . . . . . . . . . . . . . . . . . . . . . . . 101

0.17.1 Lizzeri and Persico (AER 2001) . . . . . . . . . . . . . . . . . . . . . 102

0.17.2 Diermeier, Eraslan & Merlo (Econometrica 2003) . . . . . . . . . . . 104

0.17.3 Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

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IV Discrimination and A? rmative Action

106

0.18 Theoretical Models of Discrimination . . . . . . . . . . . . . . . . . . . . . . 107

0.18.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

0.19 Taste-Based Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

0.20 Statistical Discrimination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

0.20.1 Phelps (AER, 1972) . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

0.20.2 Arrow (1973) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

0.20.3 Coate and Loury (AER, 1993) . . . . . . . . . . . . . . . . . . . . . 113

0.21 Discrimination Due to Inter-Group Interactions . . . . . . . . . . . . . . . . 118

0.21.1 Moro and Norman J. Public Econ (2003) . . . . . . . . . . . . . . . 118

0.21.2 Mailath, Samuelson and Shaked (AER, 2000) . . . . . . . . . . . . . 119

0.21.3 Eeckhout (REStud, 2006) . . . . . . . . . . . . . . . . . . . . . . . . 121

1 A? rmative Action

123

1.1 Origins of A? rmative Action . . . . . . . . . . . . . . . . . . . . . . . . . . 123

1.2 Theoretical Studies of the E?ect of A? rmative Action . . . . . . . . . . . . 125

1.2.1 Coate and Loury's Patronizing Equilibrium . . . . . . . . . . . . . . 125

1.2.2 Moro and Norman (2001) . . . . . . . . . . . . . . . . . . . . . . . . 129

1.2.3 Fang and Norman (2001) . . . . . . . . . . . . . . . . . . . . . . . . 130

1.2.4 Fryer (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

1.3 Evaluation of the E?ects of A? rmative Action . . . . . . . . . . . . . . . . 132

1.3.1 Donohue and Heckman (1991) . . . . . . . . . . . . . . . . . . . . . 132

1.3.2 Moro (2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

V Welfare Reform and Social Security

135

2 Welfare Reform

136

2.1 Some Institutional Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

2.2 Welfare Reform Bill of 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 139

2.3 Incentive E?ects of the Welfare System (Mo? tt 1992) . . . . . . . . . . . . 140

2.4 Workfare versus Welfare: Besley and Coate (1992) . . . . . . . . . . . . . . 140

2.5 A Proposal for Welfare Reform (Keane 1995) . . . . . . . . . . . . . . . . . 146

2.6 Is Time-limited Welfare Compassionate? (Fang and Silverman 2001) . . . . 147

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Acknowledgement These notes began from notes written by Hanming Fang and Dan Silverman. I have

edited them substantially in several places and added entirely new sections. They should not be held responsible for errors or omissions.

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