I have a new working paper, co-authored with Guy Meunier from INRA in Paris, with the long but clear title “The importance of considering optimal government policy when social norms matter for the private provision of public goods“. In the social norms literature that is concerned with the private provision of public goods we always see some arguments for policy interventions. However, these policy interventions are introduced as an exogenous tool void of any welfare analysis. As a result of these exogenous policies the literature focused on whether these policies crowd out or crowd in private contributions. Much of the experimental literature has thus focused also on crowding in our crowding out. Even the fashionable topic of nudging is concerned with this. However, it should be clear that the usefulness of a policy should not be measured based on whether or not a policy crowds in or out private contributions. Instead, the yardstick should be a question of optimality – in some cases a policy maker may want to crowd in contributions, in others (s)he may crowd out contributions. As long as we know that the policy choice is an optimal one, then we frankly shouldn’t care whether or not there is crowding in or out! This is the starting point for our paper.
In the paper we develop quite a few results, but one of the most important ones is that an optimal policy not necessarily induces the full contribution equilibrium, even if that full contribution equilibrium is otherwise welfare maximizing. Thus, we show that the original argument used in the literature, namely that a policy should induce the full contribution equilibrium, is not correct once one takes an optimal policy into account. This, obviously, has many implications for policy interventions when social norms and public goods interact. We also discuss social traps, government debt, path dependency, multiplicity of equilibria and the importance of parameter stability.
Social pressure can help overcome the free rider problem associated with public good provision. In the social norms literature concerned with the private provision of public goods there seems to be an implicit belief that it is best to have all agents adhere to the `good’ social norm. We challenge this view and study optimal government policy in a reference model (Rege, 2004) of public good provision and social approval in a dynamic setting. We discuss the problem with the standard crowding in and out argument and analyze the relationship with Pigouvian taxes. We show that even if complete adherence to the social norm maximizes social welfare it is by no means necessarily optimal to push society towards it. We stress the different roles of the social externality and the public good problem. We discuss the role of the cost of public funds and show how it can create path dependency, multiplicity of optimal equilibria and optimal paths, and discuss the role of parameter instability. We argue that extreme care must be taken when formulating policies and subsequent results will fully depend on this formulation.
Enjoy reading the paper, and comments are obviously warmly welcome!
Some information on my co-author: Guy Meunier is a Senior Research Fellow at the French Agricultural Research Institute (INRA), and belongs to the Food and Social Sciences Unit (ALISS). He is an Associated Researcher at the Department of Economics of the Ecole Polytechnique, Paris, and a member of the steering committee of the Chair Energy & Prosperity. His articles have been published, among many others, in the Journal of Public Economic Theory, Journal of Environmental Economics and Management, Resource and Energy Economics, and the Review of Industrial Organization.