Luxury for All: A Macroeconomic Theory of Public Provision
Abstract:
Public in-kind provision of education, healthcare, or culture accounts for a larg e share of government spending, even though redistribution can be achieved with cash transfers and externalities addressed with subsidies. We propose a new macroeconomic theory of in-kind provision, grounded in two features: (i) these goods are luxuries, with consumption rising more than proportiona lly with income; and (ii) they generate externalities that depend not only on the total level of consumption but also on its distribution across house holds. In a tractable heterogeneous-agent model, we show that these feature s make direct in-kind provision welfare-improving, even when cash transfers and subsidies are available. Using household- and country-level data, we d ocument that most publicly provided goods are luxuries and present evidence consistent with distribution-sensitive externalities. We then apply the fr amework to the design of fiscal consolidation, showing in a quantitative mo del that optimal consolidation falls primarily on goods without private sub stitutes, while preserving in-kind provision of goods with private substitu tes. Finally, our framework yields a welfare-based valuation that reduces t he measured equalizing effect of in-kind benefits in France by about one th ird.
DTSTAMP:20261113T205311Z DTSTART:20261116T163000Z DTEND:20261116T180000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR