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Money and Taxes Implement Dynamic Optimal Mechanisms

Author

Listed:
  • Bruno Biais

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Hans Gersbach

    (Ecole Polytechnique Fédérale de Zurich)

  • Jean Charles Rochet

    (UNIGE - Université de Genève = University of Geneva)

  • Ernst-Ludwig von Thadden

    (Universität Mannheim)

  • Stéphane Villeneuve

    (UT - Université de Toulouse)

Abstract

We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. Incentive compatibility requires that agents bear part of their idiosyncratic risk. The larger the agents' risk exposure, the larger the rents the principal can extract from them. The optimal mechanism can be implemented as the equilibrium of a market where agents exchange goods for money, needed to pay taxes. Inflation affects agents' portfolio choice between risky capital and safe money. To implement the optimal mechanism, the principal targets an inflation rate such that agents' risk exposure is the same in equilibrium and in the mechanism.

Suggested Citation

  • Bruno Biais & Hans Gersbach & Jean Charles Rochet & Ernst-Ludwig von Thadden & Stéphane Villeneuve, 2023. "Money and Taxes Implement Dynamic Optimal Mechanisms," Working Papers hal-04414219, HAL.
    • Handle: RePEc:hal:wpaper:hal-04414219
    DOI: 10.2139/ssrn.4571768
    as

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