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Distortionary Taxes and Public Investment When Government Promises Are Not Enforceable

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  • 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)

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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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2006/UDWP2006-07.pdf
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Bibliographic Info

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
Date of revision:
Handle: RePEc:dlw:wpaper:06-07

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Postal: Purnell Hall, Newark, Delaware 19716
Phone: (302) 831-2565
Fax: (302) 831-6968
Web page: http://www.lerner.udel.edu/departments/economics/department-economics/
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Keywords: Public Investment; Commitment; Time consistency; Discretion; Ramsey; Markov-Perfect;

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References

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  1. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
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Citations

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Cited by:
  1. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, vol. 101(5), pages 2182-2204, August.
  2. Fernando M. Martin, 2011. "Government policy in monetary economies," Working Papers 2011-026, Federal Reserve Bank of St. Louis.
  3. Fernando Martin, 2012. "Debt, Inflation and Central Bank Independence," 2012 Meeting Papers 1019, Society for Economic Dynamics.
  4. Gonzalez-Eiras, Martín & Niepelt, Dirk, 2012. "Ageing, government budgets, retirement, and growth," European Economic Review, Elsevier, vol. 56(1), pages 97-115.
  5. Dai, Meixing & Sidiropoulos, Moïse, 2010. "Monetary and fiscal policy interactions with central bank transparency and public investment," MPRA Paper 23704, University Library of Munich, Germany.
  6. Fernando M. Martin, 2011. "Policy and welfare effects of within-period commitment," Working Papers 2011-031, Federal Reserve Bank of St. Louis.
  7. Francesco Lancia & Alessia Russo, 2013. "A Dynamic Politico-Economic Model of Intergenerational contracts," Vienna Economics Papers 1304, University of Vienna, Department of Economics.

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