Can Public Loan Investments Drive Altruistic Public Goods?

[mXSCNT]

The economic problem of altruism is that some public good or service (such as pollution control) may be valued a small amount by each of a large number of people, with the total utility being high. It's in no individual's best interests to pay for the service themselves, and it's also in no individual's best interests to enter into a collective contract to pay for the service, because if any individual chooses not to enter into the payment contract they would still receive the benefit if the service is provided.

Let's take the question of direct government decision making to provide pollution control off the table for this thread. For this thread, I would like to consider only solutions that are ultimately rooted in each individual making decisions in their own economic best interests. The government may only use policy to "set the stage" for the individual decision-making, not make a direct decision about how much of the service should be provided. Direct government decision making is off topic for this thread.

I made a similar thread earlier but this one is to discuss a new idea.

The new idea is, suppose that there is a loan device wherein an individual may sign over a percentage of their future income to a creditor, in exchange for an immediate lump sum. The creditor is basically investing in the individual's future success.

If enough people in a region take out this type of loan with a single creditor, the creditor now has some (weak) incentive to behave altruistically. If spending $100 for the public good will increase incomes in the region by $20,000 altogether (summing up the income increases from each individual), and the creditor has a 1% share of the total area income, the creditor has an incentive to spend the $100 for the public good, since he expects $200 in return. The creditor's motivation is very weak, however - in this case diluted by 100 fold.

To strengthen the creditor's motivation, the government could supply matching amounts to the creditor, for public works projects that the creditor wants to fund. So if the creditor has a 1% share of the total area income, then for every 1 dollar the creditor would like to use for a public works project, the government would supply 99 dollars towards the same project. Now, if spending $100 dollars for the public good will increase incomes in the region by $105 altogether, it's in the creditor's interest to invest $1 towards the public good, because then the government will match that with $99 and the creditor will receive $1.05 in return, for a 5 cent profit. And the total net income in the region is increased by $5 (including the $1.05).

The source of the government's matching funds would be a tax on those taking this type of loan, in proportion to the percentage of their income they owe the creditor. This tax is no burden, because the total public income is expected to increase by more than the amount of the tax, thanks to the creditor's selfishly altruistic motivation.

Problems with this method:
1. Corrupt creditors - they could be bribed to invest in a "public works" project that really has primary benefit for some private organization, instead of the debtors. Or in fact, the creditors could invest in a "public works" project that actually benefits themselves directly. This could be solved or at least mitigated by requiring this type of creditor (or employees/owners of the creditor) to receive income only from the debtors.
2. The cost-benefit analysis of taking out this type of loan, or offering this type of loan, is unclear, especially compared to other types of loans.
3. It doesn't work for public works projects that improve quality of life but not incomes. Perhaps the government could provide a "quality-of-life income adjustment" that would be added to each individual's income when determining the amount the creditor receives. Or perhaps this is a problem not worth trying to solve.
4. When the percentages owed by the individual to the creditor are different, it is susceptible to a kind of arbitrage, as follows. Suppose that individual A owes the creditor 50% of his income, and individual B owes 0.01% of his income. The creditor could then fund a "public works" project that simply gives money directly to A. The government would match each dollar spent by the creditor with 3 dollars (because the average proportion of income is 25%). Since the tax is proportional to percent owed, A would pay essentially the whole tax. So A loses 3 dollars due to tax, then gains 4 dollars from the "public works" project. Half of that goes back to the creditor, so A has lost a dollar overall and the creditor has gained a dollar. The creditor could basically steal money from A.

To solve the arbitrage issue, the matching amount from the government tax would have to be based on the maximum proportion of income owed by any individual, not the average.

Thoughts?

 

[QuendeltonPG]

If the creditor has an expected return of $200 for an investment of $100 why would this be a 'weak' incentive?

Also how would such a scheme provide clear benefits over the government investing in public works with the plan to pay for them using future tax receipts, which given the increase in incomes will be greater.

 

[mXSCNT]

It's a weak motivation because it required a situation where spending $100 would produce a $20,000 increase in income in the region. Such a situation is unlikely to arise.

If spending $100 would only produce a $105 increase in income in the region, the investor would not have had an incentive to spend the $100, without government subsidy or matching of some sort.

Direct government decision making is off topic for this thread. However, note the weakness of the government's economic incentives to increase public income. Suppose the government taxes at 40% and has the opportunity to spend $100 to increase incomes by $110. They would only get back $44 in taxes on that $110 so they do not have a direct incentive to spend the $100. (Also there is the issue that income from taxes is not directly and proportionally distributed to government decision makers, so their incentive is only marginally tied to the income of the government, much less the income of the nation).

 

[QuendeltonPG]

The contract you're describing... handing over a portion of your future income for a current lump sum.. that is what a loan is anyway?

The fact remains that the situation you're describing... an individual paying for current public investment with the intention of recouping the losses by the future increase in incomes is one of the roles a government undertakes. The problems with your method don't indicate the major one that for this loan contract with a private lender, instead of the government, to be a good idea it is necessary that this situation is better than the current one where the government invests in public works.

It seems feasible there could exist some outcome/effort contingent contracts between individuals and the creditors which would act to align incentives in the way you say, but it would have to be incredibly complex and so again why is this better than the situation where the government provides the investment?

Additionally in your problems with this method you fail to mention the free riding problem you alluded to earlier. Given this is a public work your loan scheme still provides no incentive for an individual to take out this loan unless he can be excluded from the benefits of the public work.

 

[WhoWee]

The only potential conflict I can envision is the scenario where the individual is injured by either a competition or depletion of resources created by the investment.