Capital Taxation: Quantitative Explorations of the Inverse Euler Equation
AbstractThis paper provides and employs a simple method for evaluating the quantitative importance of distorting savings in Mirrleesian private-information settings. Our exercise takes any baseline allocation for consumption—from US data or a calibrated equilibrium model using current policy—and solves for the best reform that ensures preserving incentive compatibility. The Inverse Euler equation holds at the new optimized allocation. Our method provides a simple way to compute the welfare gains and optimized allocation—indeed, yielding closed form solutions in some cases. When we apply it, we find that welfare gains may be quite significant in partial equilibrium, but that general equilibrium considerations mitigate the gains significantly. In particular, starting with the equilibrium allocation from Aiyagari’s incomplete market model yields small welfare gains.
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Bibliographic InfoPaper provided by Laboratory for Macroeconomic Analysis in its series Working Papers with number CAS_RN_2007_3.
Length: 32 pages
Date of creation: Feb 2007
Date of revision:
Other versions of this item:
- Emmanuel Farhi & Iv�n Werning, 2012. "Capital Taxation: Quantitative Explorations of the Inverse Euler Equation," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 000 - 000.
- Ivan Werning & Emmanuel Farhi, 2009. "Capital Taxation: Quantitative Explorations of the Inverse Euler Equation," 2009 Meeting Papers 1262, Society for Economic Dynamics.
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- Mark Aguiar & Erik Hurst, 2005. "Consumption versus Expenditure," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 919-948, October.
- McCall, John J, 1970. "Economics of Information and Job Search," The Quarterly Journal of Economics, MIT Press, vol. 84(1), pages 113-26, February.
- Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2009.
"Dynamic Incentive Accounts,"
NBER Working Papers
15324, National Bureau of Economic Research, Inc.
- Edmans, Alex & Gabaix, Xavier & Sadzik, Tomasz & Sannikov, Yuliy, 2009. "Dynamic Incentive Accounts," CEPR Discussion Papers 7497, C.E.P.R. Discussion Papers.
- Yuliy Sannikov & Xavier Gabaix & Tomasz Sadzik & Alex Edmans, 2010. "Dynamic Incentive Accounts," 2010 Meeting Papers 1207, Society for Economic Dynamics.
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