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Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game

In: Dynamic Games: Theory and Applications

Author

Listed:
  • Herbert Dawid
  • Christophe Deissenberg
  • Pavel Ševčik

Abstract

We consider a simple dynamic model of environmental taxation that exhibits time inconsistency. There are two categories of firms, Believers, who take the tax announcements made by the Regulator to face value, and Non-Believers, who perfectly anticipate the Regulator's decisions, albeit at a cost. The proportion of Believers and Non-Believers changes over time depending on the relative profits of both groups. We show that the Regulator can use misleading tax announcements to steer the economy to an equilibrium that is Pareto superior to the solutions usually suggested in the literature. Depending upon the initial proportion of Believers, the Regulator may prefer a fast or a low speed of reaction of the firms to differences in Believers/Non-Believers profits.

Suggested Citation

  • Herbert Dawid & Christophe Deissenberg & Pavel Ševčik, 2005. "Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game," Springer Books, in: Alain Haurie & Georges Zaccour (ed.), Dynamic Games: Theory and Applications, chapter 0, pages 175-192, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-24602-4_9
    DOI: 10.1007/0-387-24602-9_9
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    Cited by:

    1. Barolini, David, 2006. "Integrated versus Separated Regulation: An Application to the Water Industry," Economics Discussion Papers 8899, University of Essex, Department of Economics.
    2. Di Bartolomeo, Giovanni & Saltari, Enrico & Semmler, Willi, 2019. "The effects of political short-termism on transitions induced by pollution regulations," EconStor Preprints 200143, ZBW - Leibniz Information Centre for Economics.

    More about this item

    Keywords

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    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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