Income taxation when markets are incomplete
We investigate the welfare effects of proportional income taxation in a standard general equilibrium model with incomplete markets (GEI). Formally, our analysis is on the allocative effects of state-contingent income tax reforms. Tax reforms are restricted to be anonymous, publicly and truthfully announced before markets open, and they are required to result in an ex-post constrained efficient allocation. Our main result is to show that there do typically exist contingent tax reforms that are Pareto improving. These reforms, acting directly on the asset span, modify private risk sharing opportunities. Thus, unlike most of the GEI literature, the type of policy transmission mechanism considered does not rely on, second order, relative spot prices effects. Yet, the key welfare effects of our tax reforms are substantially equivalent to those induced through changes in relative spot prices, as for example in Geanakoplos-Polemarchakis (1986), Geanakoplos- Magill-Quinzii-Drèze (1990), or in Citanna-Polemarchakis-Tirelli (2001).
(This abstract was borrowed from another version of this item.)
Volume (Year): 26 (2003)
Issue (Month): 2 (November)
|Contact details of provider:|| Web page: http://link.springer.de/link/service/journals/10203/index.htm|
|Order Information:||Web: http://link.springer.de/orders.htm|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, vol. 11(3), pages 495-521.
- John Geanakoplos & Andreu Mas-Colell, 1985.
"Real Indeterminacy with Financial Assets,"
Cowles Foundation Discussion Papers
770R, Cowles Foundation for Research in Economics, Yale University, revised Oct 1985.
- CITANNA, Alessandro & POLEMARCHAKIS, Herakles M. & TIRELLI, Mario, 2001.
"The taxation of trades in assets,"
CORE Discussion Papers
2001017, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
- Guesnerie, Roger, 1977.
"On the direction of tax reform,"
Journal of Public Economics,
Elsevier, vol. 7(2), pages 179-202, April.
- Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-62, January.
- Dierker, E. & Dierker, H. & Grobal, B., 1999.
"Incomplete Markets and the Firm,"
99-03, Carleton - School of Public Administration.
- Egbert Dierker & Hildegard Dierker & Birgit Grodal, 1999. "Incomplete Markets and the Firm," Discussion Papers 99-03, University of Copenhagen. Department of Economics.
- Egbert Dierker & Hildegard Dierker & Birgit Grodal, 1999. "Incomplete Markets and the Firm," CIE Discussion Papers 1999-05, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
- Egbert DIERKER & Hildegard DIERKER & Birgit GRODAL, 1999. "Incomplete Markets and the Firm," Vienna Economics Papers vie9902, University of Vienna, Department of Economics.
- Dierker, E. & Dierker, H. & Grodal, B., 1999. "Incomplete Markets and the Firm," Papers 9902, Washington St. Louis - School of Business and Political Economy.
- Grossman, Sanford J & Hart, Oliver D, 1979.
"A Theory of Competitive Equilibrium in Stock Market Economies,"
Econometric Society, vol. 47(2), pages 293-329, March.
- Sanford Grossman & Oliver Hart, 1978. "A theory of competitive equilibrium in stock market economies," Special Studies Papers 115, Board of Governors of the Federal Reserve System (U.S.).
- Feldstein, Martin, 1976. "On the theory of tax reform," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 77-104.
- David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
- Herakles Polemarchakis, 2001. "The taxation of trades in assests," Working Papers 2001-21, Brown University, Department of Economics.
- DeMarzo, Peter M., 1988. "An extension of the Modigliani-Miller theorem to stochastic economies with incomplete markets and interdependent securities," Journal of Economic Theory, Elsevier, vol. 45(2), pages 353-369, August.
- Elul Ronel, 1995. "Welfare Effects of Financial Innovation in Incomplete Markets Economies with Several Consumption Goods," Journal of Economic Theory, Elsevier, vol. 65(1), pages 43-78, February.
- Smale, S., 1974. "Global analysis and economics III : Pareto Optima and price equilibria," Journal of Mathematical Economics, Elsevier, vol. 1(2), pages 107-117, August.
- Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990.
"Generic inefficiency of stock market equilibrium when markets are incomplete,"
Journal of Mathematical Economics,
Elsevier, vol. 19(1-2), pages 113-151.
- John Geanakoplos & Michael Magill & Martine Quinzii & J. Dreze, 1988. "Generic Inefficiency of Stock Market Equilibrium When Markets Are Incomplete," Cowles Foundation Discussion Papers 863, Cowles Foundation for Research in Economics, Yale University.
When requesting a correction, please mention this item's handle: RePEc:spr:decfin:v:26:y:2003:i:2:p:97-128. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Christopher F Baum)
If references are entirely missing, you can add them using this form.