Distortionary Taxes and Public Investment When Government Promises Are Not Enforceable

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Distortionary Taxes and Public Investment When Government Promises Are Not Enforceable

Author Info

Jorge Soares, Marina Azzimonti, Pierre-Daniel Sarte (Department of Economics, University of Iowa)
Pierre-Daniel Sarte () (Federal Reserve Bank of Richmond)
Jorge Soares () (Department of Economics,University of Delaware)

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Abstract

We characterize Markov-perfect equilibria in a setting where the absence of government commitment affects the financing of productive public capital. We show that at any date, a government in office only considers intertemporal distortions over two consecutive periods in choosing taxes. We then use our framework to quantify the value of commitment, which we define as that obtained from binding governments to a course of actions that produce the second-best allocations.

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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-07.

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Length: 39 pages
Date of creation: 2006
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Handle: RePEc:dlw:wpaper:06-07

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Find related papers by JEL classification:
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-04-21 (All new papers)
NEP-MAC-2007-04-21 (Macroeconomics)
NEP-PBE-2007-04-21 (Public Economics)

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