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Intertemporal Distortions in the Second Best

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  • Stefania Albanesi
  • Roc Armenter

Abstract

This paper studies the long-run properties of intertemporal distortions in a broad class of second-best economies. Our unified framework encompasses and extends many well-known models, such as variants of the Ramsey taxation model with aggregate or idiosyncratic risk, and economies with incentive compatibility constraints due to limited commitment, political economy, self-enforcement or private information, or combinations of these. We identify a sufficient condition that rules out permanent intertemporal distortions: if there exists an allocation that satisfies all constraints and eventually converges to the limiting first-best allocation, then intertemporal distortions are temporary in the second best. This result uncovers a common optimality principle linking the intertemporal allocation of resources with the ability to front-load distortions for this broad class of environments. A series of applications illustrates the significance of these findings. Copyright , Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/restud/rds014
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Bibliographic Info

Article provided by Oxford University Press in its journal Review of Economic Studies.

Volume (Year): 79 (2012)
Issue (Month): 4 ()
Pages: 1271-1307

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Handle: RePEc:oup:restud:v:79:y:2012:i:4:p:1271-1307

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Citations

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Cited by:
  1. Sanjay K. Chugh & Andre Kurmann & David M. Arseneau, 2009. "Optimal Capital Taxation in an Economy with Capital Allocation Frictions," 2009 Meeting Papers 147, Society for Economic Dynamics.
  2. Brecher, Richard A. & Chen, Zhiqi & Choudhri, Ehsan U., 2010. "A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1392-1402, August.
  3. Yili Chien & Junsang Lee, 2006. "Why Tax Capital?," 2006 Meeting Papers 492, Society for Economic Dynamics.
  4. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2013. "Taxes, Debts, and Redistributions with Aggregate Shocks," NBER Working Papers 19470, National Bureau of Economic Research, Inc.
  5. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, vol. 95(7), pages 467-475.
  6. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.
  7. Acikgoz, Omer, 2013. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 50160, University Library of Munich, Germany.
  8. Abo-Zaid, Salem, 2009. "Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets," MPRA Paper 17489, University Library of Munich, Germany.
  9. Sanjay K. Chugh & S. Boragan Aruoba, 2009. "Money and Optimal Capital Taxation," 2009 Meeting Papers 69, Society for Economic Dynamics.
  10. Thomas Mertens & Roc Armenter, 2009. "State Verification and the Incentives to Save," 2009 Meeting Papers 289, Society for Economic Dynamics.
  11. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers 13-09, Carleton University, Department of Economics.
  12. Armenter, Roc, 2008. "A note on incomplete factor taxation," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2275-2281, October.
  13. Eric Mengus, 2012. "Foreign Debt and the Ricardian Equivalence," 2012 Meeting Papers 412, Society for Economic Dynamics.

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