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On the robustness of laissez-faire

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  • Kocherlakota, Narayana
  • Phelan, Christopher

Abstract

This paper considers a model economy in which agents are privately informed about their type: their endowments of various goods and their preferences over these goods. While preference orderings over observable choices are allowed to be correlated with an agent's private type, we assume that the planner/government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism. We model the planner/government as having a maxmin objective in the face of this uncertainty. Our main theorem is as follows: Once we allow for this kind of uncertainty and assume no wealth effects in preferences, the uniquely optimal social contract is laissez-faire, in which agents trade in unfettered markets with no government intervention of any kind.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 144 (2009)
Issue (Month): 6 (November)
Pages: 2372-2387

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Handle: RePEc:eee:jetheo:v:144:y:2009:i:6:p:2372-2387

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Mechanism design Robustness;

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References

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  1. Marco Bassetto & Christopher Phelan, 2006. "Tax riots," Working Paper Series WP-06-04, Federal Reserve Bank of Chicago.
  2. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-86, December.
  3. Atkeson, Andrew & Lucas, Robert E, Jr, 1992. "On Efficient Distribution with Private Information," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 427-53, July.
  4. Jeffrey C. Ely & Kim-Sau Chung, 2004. "Foundations of Dominant Strategy Mechanisms," Econometric Society 2004 North American Summer Meetings 169, Econometric Society.
  5. Cole, Harold L & Kocherlakota, Narayana R, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Wiley Blackwell, vol. 68(3), pages 523-42, July.
  6. Jackson, Matthew O, 1991. "Bayesian Implementation," Econometrica, Econometric Society, vol. 59(2), pages 461-77, March.
  7. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
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Citations

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Cited by:
  1. Joshua Congdon-Hohman & Anil Nathan & Justin Svec, 2013. "Student Uncertainty and Major Choice," Working Papers 1301, College of the Holy Cross, Department of Economics.
  2. Matthew C. Weinzierl, 2012. "The Promise of Positive Optimal Taxation," NBER Working Papers 18599, National Bureau of Economic Research, Inc.
  3. Felix J., Bierbrauer, 2011. "On the optimality of optimal income taxation," Journal of Economic Theory, Elsevier, vol. 146(5), pages 2105-2116, September.
  4. Justin Svec, 2010. "Optimal Fiscal Policy with Robust Control," Working Papers 1004, College of the Holy Cross, Department of Economics.
  5. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.
  6. Benjamin B. Lockwood & Matthew C. Weinzierl, 2012. "De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution," NBER Working Papers 17784, National Bureau of Economic Research, Inc.
  7. Karantounias, Anastasios G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, vol. 8(1), January.
  8. Felix Bierbrauer, 2010. "On the Optimality of Optimal Income Taxation," CESifo Working Paper Series 3163, CESifo Group Munich.
  9. Felix Bierbrauer, 2009. "Optimal Income Taxation and Public Goods Provision in a Large Economy with Aggregate Uncertainty," CESifo Working Paper Series 2701, CESifo Group Munich.

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