NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Jack J. Willis

Harvard University
Department of Economics
Littauer Center
Cambridge, MA 02138

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NBER Working Papers and Publications

January 2016Guns, Latrines, and Land Reform: Private Expectations and Public Policy
with Michael Kremer: w21915
Dynamically and statically optimal Pigouvian subsidies on durables will differ in a growing economy. For durables with positive externalities, such as sanitation, statically optimal subsidies will typically grow. However, in a dynamic game, governments can most cheaply induce optimal purchasing time by committing to eventually reduce subsidies. If governments cannot commit, there may be multiple, Pareto-ranked equilibria. The presence of multiple subsidizing bodies, including foreign donors, makes commitment more difficult. As a result, consumers may actually delay purchase, rationally anticipating growing subsidies. In the extreme, the benefits of foreign subsidies for durables that create positive externalities may be more than fully offset by such delays in private investment. For dura...
 
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