Government Incentives for Private Ownership of Public Goods: Theory and Evidence from Belgium

Abstract: We study the effect of a subsidy to land purchases by non-profits in views of creating natural reserves. A simple theoretical model finds that while the subsidy makes prices soar in the short run, the effect does not persist in time and prices decline in the long run. We suggest that this happens because the subsidy releases resources for the non-profits that allow them to exert more effort negotiating prices and stimulating supply, effectively driving prices down. We test this prediction empirically using first-hand collected notarial data from Belgium and exploiting the structural break created by the introduction of the subsidy. Using an estimation method robust to outliers, we provide a methodological contribution in the analysis of markets with quasi-donations. The method is relevant for markets of goods with patrimonial value where some sellers are willing (or are persuaded) to donate their assets for the common good.