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On the robustness of laissez-faire

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  • Kocherlakota, Narayana
  • Phelan, Christopher

Abstract

This paper considers a model economy in which agents are privately informed about their type: their endowments of various goods and their preferences over these goods. While preference orderings over observable choices are allowed to be correlated with an agent's private type, we assume that the planner/government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism. We model the planner/government as having a maxmin objective in the face of this uncertainty. Our main theorem is as follows: Once we allow for this kind of uncertainty and assume no wealth effects in preferences, the uniquely optimal social contract is laissez-faire, in which agents trade in unfettered markets with no government intervention of any kind.

Suggested Citation

  • Kocherlakota, Narayana & Phelan, Christopher, 2009. "On the robustness of laissez-faire," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2372-2387, November.
  • Handle: RePEc:eee:jetheo:v:144:y:2009:i:6:p:2372-2387
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    References listed on IDEAS

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    1. Kim-Sau Chung & J.C. Ely, 2007. "Foundations of Dominant-Strategy Mechanisms," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 447-476.
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    3. Allen, Franklin, 1985. "Repeated principal-agent relationships with lending and borrowing," Economics Letters, Elsevier, vol. 17(1-2), pages 27-31.
    4. Andrew Atkeson & Robert E. Lucas, 1992. "On Efficient Distribution With Private Information," Review of Economic Studies, Oxford University Press, vol. 59(3), pages 427-453.
    5. Jackson, Matthew O, 1991. "Bayesian Implementation," Econometrica, Econometric Society, vol. 59(2), pages 461-477, March.
    6. Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-1186, December.
    7. Harold L. Cole & Narayana R. Kocherlakota, 2001. "Efficient Allocations with Hidden Income and Hidden Storage," Review of Economic Studies, Oxford University Press, vol. 68(3), pages 523-542.
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    Cited by:

    1. Joshua Congdon-Hohman & Anil Nathan & Justin Svec, 2013. "Student Uncertainty and Major Choice," Working Papers 1301, College of the Holy Cross, Department of Economics.
    2. Benjamin B. Lockwood & Matthew Weinzierl, 2012. "De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution," Harvard Business School Working Papers 12-063, Harvard Business School, revised Sep 2014.
    3. Karantounias, Anastasios G., 2013. "Managing pessimistic expectations and fiscal policy," Theoretical Economics, Econometric Society, vol. 8(1), January.
    4. Felix J., Bierbrauer, 2011. "On the optimality of optimal income taxation," Journal of Economic Theory, Elsevier, vol. 146(5), pages 2105-2116, September.
    5. Svec, Justin, 2012. "Optimal fiscal policy with robust control," Journal of Economic Dynamics and Control, Elsevier, vol. 36(3), pages 349-368.
    6. Felix Bierbrauer, 2009. "Optimal Income Taxation and Public Goods Provision in a Large Economy with Aggregate Uncertainty," CESifo Working Paper Series 2701, CESifo Group Munich.
    7. Weinzierl, Matthew, 2014. "The promise of positive optimal taxation: normative diversity and a role for equal sacrifice," Journal of Public Economics, Elsevier, vol. 118(C), pages 128-142.
    8. Garrett, Daniel F., 2014. "Robustness of simple menus of contracts in cost-based procurement," Games and Economic Behavior, Elsevier, vol. 87(C), pages 631-641.
    9. Lockwood, Benjamin B. & Weinzierl, Matthew, 2015. "De Gustibus non est Taxandum: Heterogeneity in preferences and optimal redistribution," Journal of Public Economics, Elsevier, vol. 124(C), pages 74-80.
    10. Felix Bierbrauer, 2010. "On the Optimality of Optimal Income Taxation," CESifo Working Paper Series 3163, CESifo Group Munich.
    11. Ohanian, Lee E. & Prescott, Edward C. & Stokey, Nancy L., 2009. "Introduction to dynamic general equilibrium," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2235-2246, November.

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    Keywords

    Mechanism design Robustness;

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