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Optimal Income Taxation and Public Goods Provision in a Large Economy with Aggregate Uncertainty

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  • Felix Bierbrauer
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    Abstract

    We study a large economy model in which individuals have private information about their productive abilities and their preferences. Moreover, there is aggregate uncertainty so that the social benefits from taxation and public goods provision are a priori unknown. The analysis is based on a mechanism design approach that imposes a requirement of robustness with respect to individual beliefs and a requirement of coalition-proofness. The paper provides a tractable and intuitive characterization of incentive-feasible tax and expenditure policies: Incentive constraints associated with productive abilities reflect only individual behavior, whereas those associated with public goods preferences reflect only collective behavior.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2009/wp-cesifo-2009-07/cesifo1_wp2701.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2701.

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    Date of creation: 2009
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    Handle: RePEc:ces:ceswps:_2701

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    Related research

    Keywords: optimal taxation; public goods provision; revelation of preferences; robust mechanism design;

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    References

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    1. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    2. Gahvari, Firouz, 2006. "On the marginal cost of public funds and the optimal provision of public goods," Journal of Public Economics, Elsevier, vol. 90(6-7), pages 1251-1262, August.
    3. Paul Beaudry & Charles Blackorby & Dezs´┐Ż Szalay, 2009. "Taxes and Employment Subsidies in Optimal Redistribution Programs," American Economic Review, American Economic Association, vol. 99(1), pages 216-42, March.
    4. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
    5. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
    6. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2002. "Optimal Indirect and Capital Taxation," NajEcon Working Paper Reviews 391749000000000449, www.najecon.org.
    7. Neeman, Z., 1998. "The Relevance of Private Infromation in Mechanism Design," Papers 93, Boston University - Department of Economics.
    8. Ehud Kalai, 2004. "Large Robust Games," Econometrica, Econometric Society, vol. 72(6), pages 1631-1665, November.
    9. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
    10. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
    11. Louis Kaplow, 2003. "Public Goods and the Distribution of Income," NBER Working Papers 9842, National Bureau of Economic Research, Inc.
    12. Martin Hellwig, 2007. "A Contribution to the Theory of Optimal Utilitarian Income Taxation," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2007_2, Max Planck Institute for Research on Collective Goods.
    13. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
    14. 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.
    15. Dirk Bergemann & Stephen Morris, 2005. "Robust Mechanism Design," NajEcon Working Paper Reviews 666156000000000593, www.najecon.org.
    16. Bierbrauer, Felix, 2009. "A note on optimal income taxation, public goods provision and robust mechanism design," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 667-670, June.
    17. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2008. "Markets versus governments," Journal of Monetary Economics, Elsevier, vol. 55(1), pages 159-189, January.
    18. Kocherlakota, Narayana & Phelan, Christopher, 2009. "On the robustness of laissez-faire," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2372-2387, November.
    19. Ledyard, John O., 1978. "Incentive compatibility and incomplete information," Journal of Economic Theory, Elsevier, vol. 18(1), pages 171-189, June.
    20. Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
    21. Felix Bierbrauer, 2009. "Optimal Income Taxation and Public Good Provision with Endogenous Interest Groups," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(2), pages 311-342, 04.
    22. Al-Najjar, Nabil I., 2004. "Aggregation and the law of large numbers in large economies," Games and Economic Behavior, Elsevier, vol. 47(1), pages 1-35, April.
    23. Guesnerie,Roger, 1998. "A Contribution to the Pure Theory of Taxation," Cambridge Books, Cambridge University Press, number 9780521629560, April.
    24. Green, Jerry & Laffont, Jean-Jacques, 1977. "Characterization of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods," Econometrica, Econometric Society, vol. 45(2), pages 427-38, March.
    25. Sheshinski, Eytan, 1972. "The Optimal Linear Income-Tax," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 297-302, July.
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    Cited by:
    1. Yu-Fu Chen & Michael Funke, 2009. "Booms, Recessions and Financial Turmoil: A Fresh Look at Investment Decisions under Cyclical Uncertainty," Dundee Discussion Papers in Economics 225, Economic Studies, University of Dundee.

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