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Public Capital and Optimal Taxes Without Commitment

  • Benhabib, J.
  • Rustichini, A.
  • Velasco, A.

We consider a representative agent, infinite-horizon economy where production requires private and public capital. The supply of public capital is financed through distortionary taxation. The optimal (second best) tax policy of a benevolent government is time inconsistent. We therefore introduce explicitely the constraint that at no point in time the revision of the original tax plan is desirable. We completely characterize the (third best) tax plan that satisfies this constraint, and estimate the difference in tax rate between the second and third best policy for a wide range of parameters.

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File URL: http://econ.as.nyu.edu/docs/IO/9383/RR96-19.PDF
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Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 96-19.

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Length: 26 pages
Date of creation: 1996
Date of revision:
Handle: RePEc:cvs:starer:96-19
Contact details of provider: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Order Information: Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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