Inequality, Market Imperfections, and the Voluntary Provision of Collective Goods.∗

We analyze the effect of inequality in the distribution of endowment of private inputs (e.g., land, wealth) that are complementary in production with collective inputs (e.g., contribution to public goods such as irrigation and extraction from common-property resources) on efficiency in a simple class of collective action problems. In an environment where transaction costs prevent the efficient allocation of private inputs across individuals, and the collective inputs are provided in a decentralized manner, we characterize the optimal second-best distribution of the private input. We show that while efficiency increases with greater equality within the group of contributors and non-contributors, in some situations there is an optimal degree of inequality between the groups. ∗We thank Jean-Marie Baland, Abhijit Banerjee, Timothy Besley, Pierre-Andre Chiappori, Avinash Dixit, Paul Seabright, and workshop participants in Chicago, London School of Economics, the Conference on Inequality, Cooperation and Environmental Sustainability at the Santa Fe Institute, 2001, and the NEUDC 2001 Conference at Boston University for helpful comments. However, the responsibility for all errors and shortcomings lies only with us.