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Distortionary Taxes and Public Investment When Government Promises Are Not Enforceable

  • Jorge Soares, Marina Azzimonti, Pierre-Daniel Sarte

    (Department of Economics, University of Iowa)

  • Pierre-Daniel Sarte

    ()

    (Federal Reserve Bank of Richmond)

  • Jorge Soares

    ()

    (Department of Economics,University of Delaware)

We characterize Markov-perfect equilibria in a setting where the absence of government commitment affects the financing of productive public capital. We show that at any date, a government in office only considers intertemporal distortions over two consecutive periods in choosing taxes. We then use our framework to quantify the value of commitment, which we define as that obtained from binding governments to a course of actions that produce the second-best allocations.

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File URL: http://graduate.lerner.udel.edu/sites/default/files/ECON/PDFs/RePEc/dlw/WorkingPapers/2006/UDWP2006-07.pdf
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Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 06-07.

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Length: 39 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:dlw:wpaper:06-07
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Web page: http://lerner.udel.edu/departments/economics/department-economics/

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