In the American economy many public goods are jointly provided through government subsidies and voluntary private contributions (National Public Radio, public hospitals and universities, etc.). The current size of these government grants and the method by which they are funded are the results of a lengthy political process through which public opinion (at least theoretically) has been translated into government action. Over time, public opinion and political polarizations may shift leading to changes in policy regarding public goods. Changes in the American political scene over the past decade have spawned many substantial changes in the way in which many public goods are funded. Former Speaker of the House of Representatives Newt Gingrich, although not alone, was a vociferous advocate of significantly reducing government subsidies to many public goods with the goal of both reducing the nation's tax burden and eliminating the Federal budget deficit.
The impact of policies such as these on the net level of funding for these public goods is not clear cut. When public funding is removed, it may be the case that private contributions will increase to fill any gaps. The citizen whose tax burden was cut might make an equal increase in her or his voluntary contribution. Perhaps once there is a history of government subsidization, allowing the benefits of the public good to become apparent, people would be more willing to donate voluntarily should the government funding be withdrawn. However, economists and politicians are both well aware that public goods suffer from the free rider problem and believe that voluntary private contributions will tall short of previous public grants. In this sense, the tax-funded government subsidy, which in effect forces everyone to contribute, may engender additional voluntary contributions by allowing those who do contribute to feel that their donations were not being taken advantage of by free riders.
This paper reports on an experimental study motivated by the question of how changes in government subsidies affect contributions to public goods. The focus of the present research is to examine the effect of changes in the funding structure of public goods (i.e. given that there is some history) using a variation of Andreoni’s (1993) Public Goods Game and attempt to relate this to public policy.