Michael Reiter, Universitat Pompeu Fabra, Barcelona

Relative Preferences and Public Goods

August 1996, revised July 1998

Abstract

The paper investigates the optimal provision of public goods in the presence of relative income effects. It shows that the optimality properties of Groves mechanisms can be preserved by subjecting tax structures to a suitable coordinate transformation, provided that the strength of relative income effects are public knowledge. If relative income effects are private knowledge, standard modifications of the Clarke mechanism that guarantee a balanced budget may be used to obtain an efficient provision of the public good.