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Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution

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Author Info
Marsiliani, Laura
Renstrom, Thomas I
Abstract

Tax earmarking imposes a constraint on government policymaking, and may be desirable if it solves a time-inconsistency problem in tax policy. In a two-period economy, in which the policy decisions regarding taxes, public goods provision, and pollution abatement are taken by a majority-elected individual, we show how the time-inconsistency problem in environmental policy arises. We demonstrate that the commitment equilibrium under no earmarking rules cannot be as fully implemented as a no-commitment equilibrium under earmarking rules. However, the earmarking rules do act as a partial commitment mechanism.

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Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 110 (2000)
Issue (Month): 462 (March)
Pages: C123-38
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Handle: RePEc:ecj:econjl:v:110:y:2000:i:462:p:c123-38

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  1. Laura Marsiliani & Thomas Renstrom, 2002. "On Income Inequality and Green Preferences," Wallis Working Papers WP30, University of Rochester - Wallis Institute of Political Economy. [Downloadable!]
  2. Richard Mash & Dieter Helm & Cameron Hepburn, 2003. "Time Inconsistent Environmental Policy and Optimal Delegation," Economics Series Working Papers 175, University of Oxford, Department of Economics. [Downloadable!]
    Other versions:
  3. Chia-Ying Chang & Chien-Chieh Huang & Ping Wang, 1999. "Fight Fire with Fire: A Model of Pollution and Growth with Cooperative Settlement," Working Papers 0010, Department of Economics, Vanderbilt University, revised Apr 2000. [Downloadable!]
  4. Helmuth Cremer & Philippe De Donder & Firouz Gahvari, 2004. "Political Sustainability and the Design of Environmental Taxes," Asia-Pacific Financial Markets, Springer, vol. 11(6), pages 703-719, November. [Downloadable!] (restricted)
    Other versions:
  5. Laura Marsiliani & Thomas Renstrom, 2002. "Environmental Policy and Capital Movements: The Role of Government Commitment," Wallis Working Papers WP31, University of Rochester - Wallis Institute of Political Economy. [Downloadable!]
  6. Marie-Laure Breuillé, 2007. "Tradable deficit permits: a way to ensure sub-national fiscal discipline?," EconomiX Working Papers 2007-17, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  7. Cremer, Helmuth & De Donder, Philippe & Gahvari, Firouz, 2005. "Political competition within and between parties: an application to environmental policy," CEPR Discussion Papers 5228, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  8. Laura Marsiliani & Thomas I Renstrom, 2005. "Political Institutions, Environmental Policy and Growth," Money Macro and Finance (MMF) Research Group Conference 2005 38, Money Macro and Finance Research Group. [Downloadable!]
  9. Marsiliani, Laura & Renström, Thomas I, 2003. "Inequality, Environmental Protection and Growth," CEPR Discussion Papers 3754, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Marsiliani, Laura & Renström, Thomas I, 2003. "On Income Inequality and Green Preferences," CEPR Discussion Papers 3677, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Marsiliani, Laura & Renström, Thomas I, 2003. "Environmental Policy and Capital Movements: The Role of Government Commitment," CEPR Discussion Papers 3727, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  12. Laura Marsiliani & Thomas Renstrom, 2002. "Inequality, Environmental Protection and Growth," Wallis Working Papers WP35, University of Rochester - Wallis Institute of Political Economy. [Downloadable!]
  13. Marsiliani, L. & Renstroem, T.I., 2000. "Inequality, environmental protection and growth," Discussion Paper 34, Tilburg University, Center for Economic Research. [Downloadable!]
  14. Christophe Deissenberg & Herbert Dawid & Pavel Sevcik, 2004. "Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game," Working Papers 2004.137, Fondazione Eni Enrico Mattei. [Downloadable!]
  15. Laura Marsiliani & Thomas I. Renström, 2003. "Environmental Policy and Capital Movements: The Role of Government Commitment," Working Papers 2003.4, Fondazione Eni Enrico Mattei. [Downloadable!]
  16. Neva Novarro, 2004. "Do Policy-Makers Earmark to Constrain their Successors? The Case of Environmental Earmarking," Working Papers 0408, College of the Holy Cross, Department of Economics. [Downloadable!]
  17. Fredriksson, Per G. & Sterner, Thomas, 2004. "The Political Economy of Refunded Emissions Payment Programs," Working Papers in Economics 147, Göteborg University, Department of Economics. [Downloadable!]
    Other versions:
  18. Roques, F.A. & Nuttall, W.J. & Newbery, D.M., 2006. "Using Probabilistic Analysis to Value Power Generation Investments Under Uncertainty," Cambridge Working Papers in Economics 0650, Faculty of Economics, University of Cambridge. [Downloadable!]
  19. Agnes d'Artigues & Jacques Percebois & Thierry Vignolo, 2007. "The Time-Inconsistency of Alternative Energy Policy," Economics Working Papers ECO2007/32, European University Institute. [Downloadable!]
    Other versions:
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