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Feasible Implementation of Taxation Methods

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Abstract

This paper studies the problem of implementation of taxation methods in one-commodity environments in which the taxable incomes of the (at least two) agents are fixed and not known to the planner. In this problem (unlike most work in implementation theory), the feasible set is unknown to the designer. We first show that feasibility out of equilibrium imposes that the mechanism depend on the environment. Next we present two game forms. In the first one, which requires complete information among the tax payers, each agent reports the incomes of all players to a central agency, and implementation of every taxation method is obtained in Nash, strong and coalition-proof equilibrium. In the second, informational requirements may be somewhat relaxed. One of the agents makes a tax proposal, the others bargain with him, and the services of a central agency are used only to solve disputes between pairs of agents. This game form implements a large class of consistent and monotone taxation methods in subgame perfect equilibrium. Neither mechanism employs the off-equilibrium devices used by the general theory. Partial departures from complete information still allow for implementability. However, under fully private information implementation is not possible.

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Bibliographic Info

Paper provided by Nir Dagan in its series Economic theory and game theory with number 009.

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Date of creation: 1999
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Publication status: Published in Review of Economic Design 4:57-72 (1999)
Handle: RePEc:nid:ndagan:009

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Postal: Nir Dagan, Dept. of Economics and Management, Tel-Hai Academic College, Upper Galilee, Israel.
Web page: http://www.nirdagan.com/research/

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Keywords: Feasible Implementation; Taxation Methods; Consistency; Decentralization; Information; Flat Tax;

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References

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  1. Aumann, Robert J. & Maschler, Michael, 1985. "Game theoretic analysis of a bankruptcy problem from the Talmud," Journal of Economic Theory, Elsevier, vol. 36(2), pages 195-213, August.
  2. Nir Dagan & Roberto Serrano & Oscar Volij, 1997. "A Noncooperative View of Consistent Bankruptcy Rules," Economic theory and game theory 005, Nir Dagan.
  3. Tian, Guoqiang, 1989. "Implementation of the Lindahl Correspondence by a Single-Valued, Feasible, and Continuous Mechanism," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 613-21, October.
  4. Young, H. P., 1988. "Distributive justice in taxation," Journal of Economic Theory, Elsevier, vol. 44(2), pages 321-335, April.
  5. Tian, Guoqiang, 1991. "Implementing Lindahl Allocations by a Withholding Mechanism," MPRA Paper 41255, University Library of Munich, Germany.
  6. Eric Maskin, 1998. "Nash Equilibrium and Welfare Optimality," Harvard Institute of Economic Research Working Papers 1829, Harvard - Institute of Economic Research.
  7. Piketty Thomas, 1993. "Implementation of First-Best Allocations via Generalized Tax Schedules," Journal of Economic Theory, Elsevier, vol. 61(1), pages 23-41, October.
  8. Thomson, A., 1989. "The Consistency Principle," RCER Working Papers 192, University of Rochester - Center for Economic Research (RCER).
  9. Young, H. P., 1987. "Progressive taxation and the equal sacrifice principle," Journal of Public Economics, Elsevier, vol. 32(2), pages 203-214, March.
  10. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  11. Roberto Serrano & Rajiv Vohra, 1997. "Non-cooperative implementation of the core," Social Choice and Welfare, Springer, vol. 14(4), pages 513-525.
  12. O'Neill, Barry, 1982. "A problem of rights arbitration from the Talmud," Mathematical Social Sciences, Elsevier, vol. 2(4), pages 345-371, June.
  13. Matthew 0. Jackson, 1989. "Implementation in Undominated Strategies - A Look at Bounded Mechanisms," Discussion Papers 833, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Tian Guoqiang, 1994. "Implementation of Linear Cost Share Equilibrium Allocations," Journal of Economic Theory, Elsevier, vol. 64(2), pages 568-584, December.
  15. E. Maskin, 1983. "The Theory of Implementation in Nash Equilibrium: A Survey," Working papers 333, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Nir Dagan, 1994. "On the Least Sacrifice Principle in Taxation," Economic theory and game theory 008, Nir Dagan, revised Feb 2008.
  17. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
  18. Postlewaite, Andrew & Wettstein, David, 1989. "Feasible and Continuous Implementation," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 603-11, October.
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Cited by:
  1. Luis Corchón & Matteo Triossi, 2008. "Implementation with renegotiation when preferences and feasible sets are state dependent," Documentos de Trabajo 255, Centro de Economía Aplicada, Universidad de Chile.
  2. Ignacio García-Jurado & Julio González-Díaz & Antonio Villar, 2006. "A Non-cooperative Approach to Bankruptcy Problems," Spanish Economic Review, Springer, vol. 8(3), pages 189-197, September.
  3. Roberto Serrano, 2003. "The Theory of Implementation of Social Choice Rules," Working Papers 2003-19, Brown University, Department of Economics.
  4. Jackson, Matthew O., 1999. "A Crash Course in Implementation Theory," Working Papers 1076, California Institute of Technology, Division of the Humanities and Social Sciences.
  5. Luis C. Corchon, 2007. "The theory of implementation : what did we learn?," Economics Working Papers we081207, Universidad Carlos III, Departamento de Economía.
  6. Byungchae Rhee, 2008. "A characterization of optimal feasible tax mechanism," Social Choice and Welfare, Springer, vol. 30(4), pages 619-653, May.
  7. Matteo Triossi & Luis Corchón, 2006. "Implementation with State Dependent Feasible Sets and Preferences: A Renegotiation Approach," Carlo Alberto Notebooks 24, Collegio Carlo Alberto.
  8. Byungchae Rhee, 2004. "A Characterization of Optimal Feasible Tax Mechanism," Econometric Society 2004 Far Eastern Meetings 551, Econometric Society.
  9. Nasrollahi Shahri, Nima, 2010. "The Effectiveness of international investment instruments on the amount of foreign investment (a case study of Iran)," MPRA Paper 36317, University Library of Munich, Germany.
  10. David P�rez-Castrillo & David Wettstein, 2002. "Choosing Wisely: A Multibidding Approach," American Economic Review, American Economic Association, vol. 92(5), pages 1577-1587, December.
  11. Thomson, William, 2003. "Axiomatic and game-theoretic analysis of bankruptcy and taxation problems: a survey," Mathematical Social Sciences, Elsevier, vol. 45(3), pages 249-297, July.

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