| We study the optimal allocations of private and public goods in an economy with limited commitment. The economy is populated by a large number of heterogeneous agents. Imperfect risk sharing follows from the assumption that individuals cannot commit to honor their contractual obligations and default is punished by permanent exclusion from the intertemporal trade mechanism. We analyze three possible situations in autarchy, namely, no exclusion from public good consumption, total exclusion and partial exclusion. Our theoretical results show that for the cases of partial and no exclusion public goods are in most parameterizations underprovided relative to the full commitment first best allocation. For the total exclusion case public goods are provided at the first best level. The model is parameterized for income of the states of the US and simulated. For reasonable values of the parameters the degree of underprovision is small. |
