Voluntary contributions “vote out” public ones

Abstract

Many public goods are supported with both private and public funding. It is often argued that public funding, based on taxes, crowds out private philanthropic contributions. Agents respond to increases in taxes by decreasing their donations. The tax level, however, is not exogenous and it depends on the political equilibrium arising from agents’ voting decisions. In this paper we analyze a variety of motivations for voluntary donations and show that when philanthropic preferences become more prevalent in the society, the equilibrium tax level will tend to be lower and, more surprisingly, the stock of the public good may decrease.

Financial support from the Spanish Ministry of Science and Technology is gratefully acknowledged through the project ECO2010-21393-C04-02 and SEJ2006-09993 for the first and second author, respectively, and the Consolider-Ingenio 2010 Project “Consolidating Economics” for the last two authors.