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Markov-Perfect Optimal Taxation

  • Salvador Ortigueira

    (European University Institute)

In this paper we study optimal taxation in a dynamic game played by a sequence of governments and a private sector composed of a continuum of households. We focus on the Markov-perfect equilibrium of this game under two different assumptions on the extent of government's intra-period commitment, which in turn define two notions of time consistency of the Markov policy. Our results show that the extent of government's intra-period commitment has important quantitative implications for policies, welfare, and macroeconomic variables, and consequently that it must be explicitly stated as one of the givens of the economy, alongside preferences, markets and technology. We see this as an important result, since most of the previous literature on Markovian optimal taxation has assumed, either interchangeably or unnoticeably, different degrees of government's intra-period commitment. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 1 (January)
Pages: 153-178

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Handle: RePEc:red:issued:v:9:y:2006:i:1:p:153-178
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  1. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
  2. Dmitry V. Vedenov & Mario J. Miranda, 2001. "Numerical solution of dynamic oligopoly games with capital investment," Economic Theory, Springer, vol. 18(1), pages 237-261.
  3. Gerhard Sorger, 1997. "Markov-perfect Nash equilibria in a class of resource games," Economic Theory, Springer, vol. 11(1), pages 79-100.
  4. Paul Klein & Per Krusell & José-Víctor Ríos-Rull, 2004. "Time-Consistent Public Expenditures," Levine's Bibliography 122247000000000652, UCLA Department of Economics.
  5. Christopher Phelan & Ennio Stacchetti, 1999. "Sequential equilibria in a Ramsey tax model," Staff Report 258, Federal Reserve Bank of Minneapolis.
  6. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  7. repec:oup:restud:v:55:y:1988:i:2:p:263-74 is not listed on IDEAS
  8. Eric Maskin & Jean Tirole, 1997. "Markov Perfect Equilibrium, I: Observable Actions," Harvard Institute of Economic Research Working Papers 1799, Harvard - Institute of Economic Research.
  9. Judd, Kenneth L., 1992. "Projection methods for solving aggregate growth models," Journal of Economic Theory, Elsevier, vol. 58(2), pages 410-452, December.
  10. Turnovsky, Stephen J. & Brock, William A., 1980. "Time consistency and optimal government policies in perfect foresight equilibrium," Journal of Public Economics, Elsevier, vol. 13(2), pages 183-212, April.
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