State Verification and the Incentives to Save
We consider a simple state verification technology in a dynamic private information economy. We find that the marginal benefit may be below the marginal cost of investment under the constrained efficient allocation. In particular, if the planner can verify a the type of a sufficiently large fraction of agents, then savings should be either subsidized or not taxed. In contrast, the prescriptions with respect to the labor supply are unchanged with the state verification technology.
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