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Diamond-Mirrlees meets Sims: Optimal Taxation with Rational Inattention

Author

Listed:
  • George-Marios Angeletos
  • Matias Bayas-Erazo

Abstract

We study optimal commodity taxation when consumers are rationally inattentive and the planner internalizes their attention costs. In our setting, consumers may underreact to taxes, may allocate attention unevenly across goods, and may display sparse behavior or mental accounting. Our main result is that this need not change tax design: in a benchmark, optimal taxes satisfy the same sufficient-statistics formulas as in classical public finance, regardless of the extent and endogeneity of inattention. Away from this benchmark, we offer a dual rationale for state-dependent taxes and a new lens on tax salience; but we still find no room for the adjustments emphasized in recent work on behavioral public finance.

Suggested Citation

  • George-Marios Angeletos & Matias Bayas-Erazo, 2026. "Diamond-Mirrlees meets Sims: Optimal Taxation with Rational Inattention," NBER Working Papers 35741, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35741
    Note: EFG PE
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    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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