Optimal taxation with persistent shocks
AbstractIn this paper I study dynamic optimal taxation in a private information economy with continuum of individual productivity shocks that are persistent over time. I formulate the problem recursively and use first order approach to simplify it. I provide full justification of the first order approach. The advantage of the first order approach is twofold. First, as is well known, it simplifies the incentive compatibility constraint. Second, and this is a new feature in this model, it dramatically reduces the state space of the dynamic program. Instead of using the continuation utility function as a state, we use the marginal continuation utility as a state. This feature is extremely useful because it allows us to numericaly implement the dynamic program and solve quantitatively for the optimal allocations
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number 689.
Date of creation: 2004
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Other versions of this item:
- 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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- Yuzhe Zhang, 2005. "Dynamic contracting, persistent shocks and optimal taxation," Working Papers 640, Federal Reserve Bank of Minneapolis.
- Marek Kapicka, 2006. "Optimal Income Taxation with Human Capital Accumulation and Limited Record Keeping," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(4), pages 612-639, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
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