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Capital income taxation when markets are incomplete

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  • TIRELLI, Mario

Abstract

In this paper we investigate the welfare effects of capital income taxation in a standard one commodity general equilibrium model with incomplete markets (GEI) and production. We consider a competitive economy of two periods with uncertainty over a finite number S of possible states of nature revealed in the second period. One perishable commodity is traded on (S + 1) spot markets, there are 1 1 of consumer types. Securities are equity contracts; claims on second period's returns from production plans which are selected by J firms in the interest of shareholders. The number of such contracts is insufficient to span all possible contingencies; that is we assume that the security markets are incomplete. The central planner is (uniquely) endowed with a system of ad-valorem taxes on corporate dividends. If H is not too large, there exist tax reforms that have positive welfare effects; yet, tax reforms with opposite effects do also exist. This result has implications for the theory of optimal taxation and social discounting.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000011.

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Date of creation: 01 Feb 2000
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Handle: RePEc:cor:louvco:2000011

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  1. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
  2. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
  3. Guesnerie Roger, 1976. "On the direction of tax reform," CEPREMAP Working Papers (Couverture Orange) 7603, CEPREMAP.
  4. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, vol. 11(3), pages 495-521.
  5. DeMarzo, Peter M., 1988. "An extension of the Modigliani-Miller theorem to stochastic economies with incomplete markets and interdependent securities," Journal of Economic Theory, Elsevier, vol. 45(2), pages 353-369, August.
  6. Grinols, Earl L., 1985. "Public investment and social risk-sharing," European Economic Review, Elsevier, vol. 29(3), pages 303-321.
  7. Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104.
  8. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
  9. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-62, January.
  10. Smale, S., 1974. "Global analysis and economics III : Pareto Optima and price equilibria," Journal of Mathematical Economics, Elsevier, vol. 1(2), pages 107-117, August.
  11. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  12. Elul Ronel, 1995. "Welfare Effects of Financial Innovation in Incomplete Markets Economies with Several Consumption Goods," Journal of Economic Theory, Elsevier, vol. 65(1), pages 43-78, February.
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Cited by:
  1. Sergio Turner & Norovsambuu Tumennasan, 2006. "Pareto Improving Monetary Policy in Incomplete Markets," Working Papers 2006-04, Brown University, Department of Economics.

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