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Optimal Degree of Commitment in a Tax Policy

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  • Yusuke Kinai

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    (Graduate School of Economics, Osaka University)

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    Abstract

    In analyzing economic policies, a severe problem is the time-inconsistency problem. In this regard, the choice of commitment vs. discretion engenders a tradeoff of flexibility and credibility. Therefore, it might be necessary and acceptable to adopt a discretionary policy to some degree, but past studies do not clarify the degree to which a government exercises such a discretionary option. This paper clarifies the optimal degree of commitment using the framework of a repeated game reported by Chari and Kehoe (1990). We point out the relation between the optimal degree of commitment and the rate of time preference.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/1111.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 11-11.

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    Length: 27 pages
    Date of creation: Mar 2011
    Date of revision:
    Handle: RePEc:osk:wpaper:1111

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: Commitment vs. Flexibility; Degree of Commitment; Imperfect Public Monitoring; Repeated Games; Tax Policy.;

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    1. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 140, Federal Reserve Bank of Minneapolis.
    2. Christopher Phelan & Ennio Stacchetti, 2001. "Sequential Equilibria in a Ramsey Tax Model," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1491-1518, November.
    3. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
    4. Anderson Schneider & Facundo Piguillem, 2009. "Heterogeneous Beliefs and Optimal Taxation," 2009 Meeting Papers, Society for Economic Dynamics 826, Society for Economic Dynamics.
    5. Kurozumi, Takushi, 2008. "Optimal sustainable monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(7), pages 1277-1289, October.
    6. Catarina Reis, 2013. "Taxation without commitment," Economic Theory, Springer, Springer, vol. 52(2), pages 565-588, March.
    7. In-Koo Cho & Akihiko Matsui, 2005. "Time Consistency In Alternating-Move Policy Games," The Japanese Economic Review, Japanese Economic Association, Japanese Economic Association, vol. 56(3), pages 273-294.
    8. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
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