@Government and the provision of public goods

Governmentandtheprovisionofpublicgoods:fromequilibriummodelstomechanismdesign∗MoniqueFlorenzanoParisSchoolofEconomics,CES106–112boulevarddel’Hˆopital75013Paris,Francemonique.fl[e-mail]1IntroductionAfterthesecondworldwar,mostofEuropeangovernmentswerecurrentlysupposedandrequiredtocoordinateandstimulatethereconstructioneffortofnationaleconomiesdevas-tatedbythewar,toprovidethepublicgoodsandservicesinHealth,Education,Researchandallkindsofpublicinfrastructureswhichhavemadepossiblethesubstantialeconomicgrowthofthisperiod,and,whenpossible,toregulatethisgrowthbycontra-cyclicalfiscalandmonetarypolicies.Sixtyyearsafter,asaresultofthemovementofglobalization–regionalizationofalleconomiesovertheworldandtheconstructionoflargeeconomicareasonthemodeloftheEuropeanUnioncommonmarket,thecommonrepresentationofgovernments’taskshasprogressivelybutdramaticallychanged.Publicfirmshavebeenprivatized,thepublicgoodsprovisionhasbeenlargelyderegulated,welfareprogramsarecutandbudgetdeficitsarefought.Theseevolutionshavebeenpassivelyacceptedinthegeneralcontextoftheweakeningoftheconceptof‘Etat-Nation’,undertheincreasinginfluenceofliberalandfree-tradeideology.Roughlyspeaking,evenifanumberofcerti-tudesarenowadaysseriouslycracked,theparadigmofacentral,omniscient,omnipotent(andbenevolent)policymakerhasbeenrelaxed,replacedbytheideaofamultitudeofpublicobjectivesdefinedatseveral,moreorlesscoordinated,levels:national,interna-tional,regional,orevenbranchlevel.Tofulfilltheseobjectives,mostofthetraditionaleconomicpolicyinstruments,supposedtocontradictinternationalagreements,arepre-sentedasinadequate,whiletheothersmainlyfocusonestablishingrulesthatguaranteethefaircompetitionofprivatefirms.Onepurposeofthispaperistostudyhowthechangesinthecommonrepresenta-tionofgovernments’tasksarereflectedintotheevolutionofthepublicgoodsprovision∗AfirstdraftofthispaperwaspreparedfortheParisHPEConference(December2008).Thisversionhasbenefittedfromthecommentsoftheparticipants,especiallyofF.AdamanandY.M.Madrawhopresentedapaperatthesamesession.Specialthanksgoto¨U.Zenginobuzforlongstandingdiscussionsonmechanismdesign,toP.Courr`ege,F.Gardes,A.Lapidus,andtoananonymousrefereeforconstructivesuggestions.Conclusionsareobviouslymine.AtheoreticalexpositionofequilibriumconceptsforpublicgoodsprovisioncanbefoundinFlorenzano(2009),andgeneraloverviewsonmechanismdesigninJackson(2003),Mookherjee(2008),RSAS(2007).halshs-00531464,version1-2Nov2010Authormanuscript,publishedinEuropeanJournalofHistoryofEconomicThought17,4(2010)1047-1077DOI:10.1080/09672567.2010.499469theory,especiallyatitsmostformalizedlevel.Specifically,recallthatthefiftiesaretheyearsofcreationandformalizationofthemoderngeneralequilibriumtheory.Duringthisperiod,armedwiththeambitionofprovidingacoherentframeworkforunderstandingmarketfunctioninginclassicalandnon-classicalenvironments,mechanismdesigntheoryhasdifficultyinelaboratingageneraldefinitionforthedesignofinstitutionsthroughwhichindividualsinteract.Inthefollowingdecades,simultaneouslywiththedefinitionoftheresearchprogramofitsinitiators,theArrow–Debreumodel1hasprogressivelybeenenrichedinordertoweakenassumptionsandtoaccommodate,oneaftertheother,mostofthedifferentissuestackledbyneoclassicaleconomics.ThepublicationbySamuelsonin1954ofaninfluentialpaperstatinginageneralequilibriumframeworktheoptimalityproblemassociatedwiththeprovisionofpublicgoodsandthedistributionoftaxburdenspavedthewayforthedefinitionofequilibriumconceptsforaneconomywithpublicgoods.Suchanobjectivewasdiverselyaddressedbythescientificcommunityofgeneralequi-librium.Intheseventiessomegeneralequilibriummodelswerestudyingtheequilibriumof“secondbest”economieswheretheexistenceoftaxes,lumpsumtransfersandthegovern-mentalprovisionofpublicgoodswereexplicitlymodeledasexogenousdata.Moreorlessatthesameperiod,Russiantheoristsanalyzedgeneralequilibriumof“mixedeconomies”withsomegoodspubliclyprovidedinfixedquantitiesand/oratfixedpricesandresoldatcompetitivepricesonsecondarycompetitivemarkets.Theembeddingingeneralequilib-riummodelsofpricingrulesfixedbythegovernmentforgoods,whichareusefulfromapublicpolicyviewpointbutthatmarketmayfailtoprovide,wasalsoactivelyworkedout.Onecouldevokeinadditiontheabundanttheoreticalelaborationinthistimeonplanningofmixedeconomies.Inallthesetheoreticalworks,therationalityofpublicchoicesisim-plicitlyassumedtobedeterminedoutsidethefunctioningofthecompetitivesystem.Incounterpart,governmentalinterventions,whoseobjectivesaretakenasgivenbytheagentsofthecompetitivesystem,areassumedtodeterminethecharacteristicsofconsumers’andproducers’behaviorand,inparticular,toinfluencetheproductionpossibilitiesoffirms.Thetaskofgeneralequilibriumtheoristsistoinvestigatethepossibilityofequilibrium,giventhesepublicpolicies,andeventuallytolookforminimizingthedistortionsintroducedbythegovernmentinterventions.Thisisincontrastwithtwopolarequilibriummodels,workedoutatthesameperiod,wheretheprovisionofpublicgoodsentersasanargumentinconsumer’sutilityfunctionandsodeterminestheequilibriumamountoftheirprovisionandtheirequilibriumprice.Inthefirstone,whoselik