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Intertemporal Distortions in the Second best

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  • Stefania Albanesi
  • Roc Armenter

Abstract

This paper studies the long run properties of intertemporal distortions in a broad class of second best economies. Our unified framework encompasses and extends many well known models, such as variants of the Ramsey taxation model with aggregate or idiosyncratic risk, and economies with incentive compatibility constraints due to limited commitment, political economy, self-enforcement or private information, or combinations of these. We identify a sufficient condition that rules out permanent intertemporal distortions: If there exists an allocation that satisfies all constraints and eventually converges to the limiting first best allocation, then intertemporal distortions are temporary in the second best. This result uncovers a common optimality principle linking the intertemporal allocation of resources with the ability to frontload distortions for this broad class of environments. A series of applications illustrates the significance of these findings.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13629.

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Date of creation: Nov 2007
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Publication status: published as Stefania Albanesi & Roc Armenter, 2012. "Intertemporal Distortions in the Second Best," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1271-1307.
Handle: RePEc:nbr:nberwo:13629

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Citations

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Cited by:
  1. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.
  2. Junsang Lee & Yili Chien, 2008. "Why Tax Capital?," ANU Working Papers in Economics and Econometrics 2008-497, Australian National University, College of Business and Economics, School of Economics.
  3. Brecher, Richard A. & Chen, Zhiqi & Choudhri, Ehsan U., 2010. "A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1392-1402, August.
  4. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Ramsey Taxation," Levine's Working Paper Archive 122247000000002192, David K. Levine.
  5. Abo-Zaid, Salem, 2009. "Optimal Monetary Policy and Downward Nominal Wage Rigidity in Frictional Labor Markets," MPRA Paper 17489, University Library of Munich, Germany.
  6. Sanjay K. Chugh & S. Boragan Aruoba, 2009. "Money and Optimal Capital Taxation," 2009 Meeting Papers 69, Society for Economic Dynamics.
  7. Acikgoz, Omer, 2013. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 50160, University Library of Munich, Germany.
  8. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers 13-09, Carleton University, Department of Economics.
  9. Eric Mengus, 2012. "Foreign Debt and the Ricardian Equivalence," 2012 Meeting Papers 412, Society for Economic Dynamics.
  10. Sanjay K. Chugh & Andre Kurmann & David M. Arseneau, 2009. "Optimal Capital Taxation in an Economy with Capital Allocation Frictions," 2009 Meeting Papers 147, Society for Economic Dynamics.
  11. Armenter, Roc, 2008. "A note on incomplete factor taxation," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2275-2281, October.
  12. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2013. "Taxes, Debts, and Redistributions with Aggregate Shocks," NBER Working Papers 19470, National Bureau of Economic Research, Inc.
  13. Thomas Mertens & Roc Armenter, 2009. "State Verification and the Incentives to Save," 2009 Meeting Papers 289, Society for Economic Dynamics.

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