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Credibility and endogenous societal discounting

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Author Info

  • Christopher Sleet

    (Carnegie Mellon University)

  • Sevin Yeltekin

    (Northwestern University)

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    Abstract

    We consider a dynamic moral hazard economy inhabited by a planner and a population of privately informed agents. We assume that the planner and the agents share the same discount factor, but that the planner cannot commit. We show that optimal allocations in such settings solve the problems of committed planners who discount the future less heavily than agents. Thus, we provide micro-foundations for dynamic moral hazard models that assume a societal discount factor in excess of the private one. We extend the analysis to allocations that are reconsideration-proof in the sense of Kocherlakota (1996). We show that these allocations solve the choice problem of a committed planner with a unit discount factor. (Copyright: Elsevier)

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    File URL: http://dx.doi.org/10.1016/j.red.2006.03.001
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    Bibliographic Info

    Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

    Volume (Year): 9 (2006)
    Issue (Month): 3 (July)
    Pages: 410-437

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    Handle: RePEc:red:issued:05-139

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    Related research

    Keywords: Credibility; Commitment; Dynamic private information; Social insurance;

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    References

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    1. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
    2. 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.
    3. Berliant, Marcus & Ledyard, John, 2011. "Optimal Dynamic Nonlinear Income Taxes with No Commitment," MPRA Paper 31749, University Library of Munich, Germany.
    4. Phelan, Christopher, 1998. "On the Long Run Implications of Repeated Moral Hazard," Journal of Economic Theory, Elsevier, vol. 79(2), pages 174-191, April.
    5. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," Levine's Bibliography 321307000000000032, UCLA Department of Economics.
    6. Roberts, Kevin, 1984. "The Theoretical Limits of Redistribution," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 177-95, April.
    7. Kocherlakota, Narayana R., 1996. "Reconsideration-Proofness: A Refinement for Infinite Horizon Time Inconsistency," Games and Economic Behavior, Elsevier, vol. 15(1), pages 33-54, July.
    8. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
    9. Adriano Rampini & Alberto Bisin, 2005. "Markets as Beneficial Constraints on the Government," 2005 Meeting Papers 325, Society for Economic Dynamics.
    10. Emmanuel Farhi & Iván Werning, 2010. "Progressive Estate Taxation," The Quarterly Journal of Economics, MIT Press, vol. 125(2), pages 635-673, May.
    11. Farrell, Joseph & Maskin, Eric, 1987. "Renegotiation in Repeated Games," Department of Economics, Working Paper Series qt9wv3h5jb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    12. Christopher Phelan, 2005. "Opportunity and social mobility," Staff Report 323, Federal Reserve Bank of Minneapolis.
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    Cited by:
    1. Garriga, Carlos & Sánchez-Losada, Fernando, 2009. "Indirect taxation and the welfare effects of altruism on the optimal fiscal policy," Economic Modelling, Elsevier, vol. 26(6), pages 1365-1374, November.
    2. Alexander Karaivanov & Fernando Martin, . "Dynamic Optimal Insurance and Lack of Commitment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    3. Roozbeh Hosseini & Larry E. Jones & Ali Shourideh, 2009. "Risk Sharing, Inequality and Fertility," NBER Working Papers 15111, National Bureau of Economic Research, Inc.
    4. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Ramsey Taxation," Levine's Working Paper Archive 122247000000002192, David K. Levine.
    5. Albanesi, Stefania & Armenter, Roc, 2007. "Intertemporal Distortions in the Second Best," CEPR Discussion Papers 6577, C.E.P.R. Discussion Papers.
    6. Irina Yakadina & Michael Kumhof, 2007. "Politically Optimal Fiscal Policy," IMF Working Papers 07/68, International Monetary Fund.
    7. Sleet, Christopher & Yeltekin, Sevin, 2008. "Politically credible social insurance," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 129-151, January.

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