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Intertemporal Distortions in the Second best

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  • Stefania Albanesi
  • Roc Armenter

Abstract

This paper studies the long run properties of intertemporal distortions in a broad class of second best economies. Our unified framework encompasses and extends many well known models, such as variants of the Ramsey taxation model with aggregate or idiosyncratic risk, and economies with incentive compatibility constraints due to limited commitment, political economy, self-enforcement or private information, or combinations of these. We identify a sufficient condition that rules out permanent intertemporal distortions: If there exists an allocation that satisfies all constraints and eventually converges to the limiting first best allocation, then intertemporal distortions are temporary in the second best. This result uncovers a common optimality principle linking the intertemporal allocation of resources with the ability to frontload distortions for this broad class of environments. A series of applications illustrates the significance of these findings.

Suggested Citation

  • Stefania Albanesi & Roc Armenter, 2007. "Intertemporal Distortions in the Second best," NBER Working Papers 13629, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:13629
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    Cited by:

    1. Fabio Ghironi & Sanjay K. Chugh, 2010. "Optimal Fiscal Policy with Endogenous Product Variety," 2010 Meeting Papers 812, Society for Economic Dynamics.
    2. Sanjay K. Chugh & S. Boragan Aruoba, 2009. "Money and Optimal Capital Taxation," 2009 Meeting Papers 69, Society for Economic Dynamics.
    3. Martin, Fernando M., 2011. "On the joint determination of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 132-145, March.
    4. Acemoglu, Daron & Golosov, Mikhail & Tsyvinski, Aleh, 2011. "Political economy of Ramsey taxation," Journal of Public Economics, Elsevier, vol. 95(7), pages 467-475.
    5. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers 13-09, Carleton University, Department of Economics.
    6. David M. Arseneau & Sanjay K. Chugh, 2012. "Tax Smoothing in Frictional Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 926-985.
    7. Abo-Zaid, Salem, 2013. "Optimal monetary policy and downward nominal wage rigidity in frictional labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 345-364.
    8. Sanjay K. Chugh & Andre Kurmann & David M. Arseneau, 2009. "Optimal Capital Taxation in an Economy with Capital Allocation Frictions," 2009 Meeting Papers 147, Society for Economic Dynamics.
    9. Sanjay K. Chugh & Wolfgang Lechthalerz & Christian Merkl, 2015. "Optimal Fiscal Policy with Labor Selection," Boston College Working Papers in Economics 884, Boston College Department of Economics.
    10. Yili Chien & Junsang Lee, 2006. "Why Tax Capital?," 2006 Meeting Papers 492, Society for Economic Dynamics.
    11. Thomas Mertens & Roc Armenter, 2009. "State Verification and the Incentives to Save," 2009 Meeting Papers 289, Society for Economic Dynamics.
    12. Omer Acikgoz, 2014. "Transitional Dynamics and Long-Run Optimal Taxation under Incomplete Markets," 2014 Meeting Papers 990, Society for Economic Dynamics.
    13. Begoña Domínguez & Zhigang Feng, 2016. "The Time-Inconsistency Problem of Labor Taxes and Constitutional Constraints," Dynamic Games and Applications, Springer, vol. 6(2), pages 225-242, June.
    14. Acikgoz, Omer, 2015. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 73380, University Library of Munich, Germany.
    15. Chen, Yunmin & Chien, YiLi & Yang, C.C., 2015. "Individual and Aggregate Constrained Efficient Intertemporal Wedges in Dynamic Mirrleesian Economies," Working Papers 2015-43, Federal Reserve Bank of St. Louis, revised 01 Apr 2016.
    16. Brecher, Richard A. & Chen, Zhiqi & Choudhri, Ehsan U., 2010. "A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1392-1402, August.
    17. Acikgoz, Omer, 2013. "Transitional Dynamics and Long-run Optimal Taxation Under Incomplete Markets," MPRA Paper 50160, University Library of Munich, Germany.
    18. Armenter, Roc, 2008. "A note on incomplete factor taxation," Journal of Public Economics, Elsevier, vol. 92(10-11), pages 2275-2281, October.
    19. Xi Chen & Yu Chen & Xuhu Wan, 2018. "Delegated Project Search," Graz Economics Papers 2018-11, University of Graz, Department of Economics.
    20. Long, Iain W. & Polito, Vito, 2014. "Unemployment, Crime and Social Insurance," Cardiff Economics Working Papers E2014/9, Cardiff University, Cardiff Business School, Economics Section.
    21. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2013. "Taxes, Debts, and Redistributions with Aggregate Shocks," NBER Working Papers 19470, National Bureau of Economic Research, Inc.
    22. Eric Mengus, 2012. "Foreign Debt and the Ricardian Equivalence," 2012 Meeting Papers 412, Society for Economic Dynamics.
    23. Conesa, Juan C. & Domínguez, Begoña, 2013. "Intangible investment and Ramsey capital taxation," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 983-995.

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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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