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Optimal Income Taxation and Public Goods Provision in a Large Economy with Aggregate Uncertainty

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  • Felix Bierbrauer

Abstract

We study a large economy model in which individuals have private information about their productive abilities and their preferences. Moreover, there is aggregate uncertainty so that the social benefits from taxation and public goods provision are a priori unknown. The analysis is based on a mechanism design approach that imposes a requirement of robustness with respect to individual beliefs and a requirement of coalition-proofness. The paper provides a tractable and intuitive characterization of incentive-feasible tax and expenditure policies: Incentive constraints associated with productive abilities reflect only individual behavior, whereas those associated with public goods preferences reflect only collective behavior.

Suggested Citation

  • 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.
  • Handle: RePEc:ces:ceswps:_2701
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp2701.pdf
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    References listed on IDEAS

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    4. Judd, Kenneth L., 1985. "The law of large numbers with a continuum of IID random variables," Journal of Economic Theory, Elsevier, vol. 35(1), pages 19-25, February.
    5. Kaplow, Louis, 2006. "Public goods and the distribution of income," European Economic Review, Elsevier, vol. 50(7), pages 1627-1660, October.
    6. Kocherlakota, Narayana & Phelan, Christopher, 2009. "On the robustness of laissez-faire," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2372-2387, November.
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    19. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    20. Bierbrauer, Felix, 2009. "A note on optimal income taxation, public goods provision and robust mechanism design," Journal of Public Economics, Elsevier, vol. 93(5-6), pages 667-670, June.
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    23. Felix Bierbrauer, 2009. "Optimal Income Taxation and Public Good Provision with Endogenous Interest Groups," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(2), pages 311-342, April.
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    Citations

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    Cited by:

    1. Felix J. Bierbrauer & Martin F. Hellwig, 2015. "Public-Good Provision in Large Economies," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2015_12, Max Planck Institute for Research on Collective Goods.
    2. Bierbrauer Felix J., 2016. "Effizienz oder Gerechtigkeit?," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(1), pages 2-24, April.
    3. Felix Bierbrauer, 2016. "Effizienz oder Gerechtigkeit? Ungleiche Einkommen, ungleiche Vermögen und die Theorie der optimalen Besteuerung," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2016_03, Max Planck Institute for Research on Collective Goods.
    4. Yu-Fu Chen & Michael Funke, 2010. "Booms, Recessions And Financial Turmoil: A Fresh Look At Investment Decisions Under Cyclical Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 57(s1), pages 290-317, July.
    5. Felix J. Bierbrauer & Martin F. Hellwig, 2015. "Public-Good Provision, Mechanism Design and Voting," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2015_11, Max Planck Institute for Research on Collective Goods.

    More about this item

    Keywords

    optimal taxation; public goods provision; revelation of preferences; robust mechanism design;

    JEL classification:

    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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