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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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Cited by:
  1. Martin, Fernando M., 2011. "On the joint determination of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 132-145, March.
  2. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, vol. 95(7), pages 467-475.
  3. Sanjay K. Chugh & S. Boragan Aruoba, 2009. "Money and Optimal Capital Taxation," 2009 Meeting Papers 69, Society for Economic Dynamics.
  4. Junsang Lee & Yili Chien, 2008. "Why Tax Capital?," ANU Working Papers in Economics and Econometrics 2008-497, Australian National University, College of Business and Economics, School of Economics.
  5. 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.
  6. 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.
  7. Armenter, Roc, 2008. "A note on incomplete factor taxation," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2275-2281, October.
  8. Thomas Mertens & Roc Armenter, 2009. "State Verification and the Incentives to Save," 2009 Meeting Papers 289, Society for Economic Dynamics.

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