Christophe Deissenberg (University of Aix-Marseille II) Herbert Dawid (University of Bielefeld) Pavel Sevcik (GREQAM and University of Aix-Marseille II)
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We consider a simple dynamic model of environmental taxation that exhibits time inconsistency. There are two categories of firms, Believers, who take the tax announcements made by the Regulator to face value, and Non-Believers, who perfectly anticipate the Regulator's decisions, albeit at a cost. The proportion of Believers and Non- Believers changes over time depending on the relative profits of both groups. We show that the Regulator can use misleading tax announcements to steer the economy to an equilibrium that is Pareto superior to the solutions usually suggested in the literature. Depending upon the initial proportion of Believers, the Regulator may prefer a fast or a low speed of reaction of the firms to differences in Believers/Non-Believers profits.
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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number
2004.137.
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