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Intertemporal Distortions in the Second best

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Stefania Albanesi
Roc Armenter

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Abstract

We consider a very general class of public finance problems that encompasses the Ramsey model of optimal taxation as well as economies with limited commitment, private information, and political economy frictions, and allows for incomplete markets. We identify a sufficient condition to rule out permanent intertemporal distortions at the optimum. If there exists an admissible allocation that converges to the first best steady state, then all intertemporal distortions are temporary in the second best. We analyze a series of applications to illustrate the significance of this result.

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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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Handle: RePEc:nbr:nberwo:13629

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Find related papers by JEL classification:
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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  1. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2008. "Political Economy of Ramsey Taxation," Levine's Bibliography 122247000000002192, UCLA Department of Economics. [Downloadable!]
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