Optimal public policy and endogenous preferences: an application to an economy with for-profit and non-profit enterprises

We present a general equilibrium model where profit-maximizing firms and non-profit organizations coexist, and the people’s propensity to devote efforts to non-profit activities increases with the stock of social capital. In its turn, the formation of social capital is stimulated by an increase in the aggregate volume of non-profit activities. Therefore, a public policy subsidizing the nonprofits has an indirect effect on people’s preferences concerning the effort to devote to these organizations via its positive impact on the accumulation of social capital. Within this framework, we analyze the optimal policies of a government facing myopic or rational agents.