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Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty

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  • Florian Scheuer

    (Stanford University)

Abstract

This paper studies Pareto-optimal risk-sharing arrangements in a private information economy with aggregate uncertainty and ex ante heterogeneous agents. I show how to implement Pareto-optima as equilibria when agents can trade claims to consumption contingent on aggregate shocks in financial markets. The first result is that if aggregate and idiosyncratic shocks are independent, the implementation of optimal allocations does not require any interventions in financial markets. This result can be extended to dynamic settings in the sense that, in this case, only savings need to be distorted, but not trades in financial markets. Second, I characterize optimal trading distortions in financial markets when aggregate and idiosyncratic shocks are not independent. In this case, optimal asset taxes must be higher for those securities that pay out in aggregate states in which consumption is more volatile. For instance, this can provide an efficiency justification for the frequently observed differential tax treatment of different asset classes, such as debt and equity claims. (Copyright: Elsevier)

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

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Handle: RePEc:red:issued:11-235

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Keywords: Insurance; Aggregate uncertainty; Financial markets; Optimal taxation;

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References

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  1. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
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  14. repec:bla:restud:v:75:y:2008:i:3:p:649-669 is not listed on IDEAS
  15. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  16. Florian Scheuer, 2012. "Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty," NBER Working Papers 17817, National Bureau of Economic Research, Inc.
  17. Emannauel Farhi & Ivan Werning, 2006. "Capital Taxation," 2006 Meeting Papers 455, Society for Economic Dynamics.
  18. Paul R. Milgrom, 1979. "Good Nevs and Bad News: Representation Theorems and Applications," Discussion Papers 407R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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Cited by:
  1. Florian Scheuer, 2012. "Optimal Asset Taxes in Financial Markets with Aggregate Uncertainty," NBER Working Papers 17817, National Bureau of Economic Research, Inc.

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