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State Verification and the Incentives to Save

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  • Thomas Mertens

    (Harvard University)

  • Roc Armenter

    (Federal Reserve Bank of Philadelphia)

Abstract

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.

Suggested Citation

  • Thomas Mertens & Roc Armenter, 2009. "State Verification and the Incentives to Save," 2009 Meeting Papers 289, Society for Economic Dynamics.
  • Handle: RePEc:red:sed009:289
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    File URL: https://economicdynamics.org/meetpapers/2009/paper_289.pdf
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    References listed on IDEAS

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    1. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, September.
    2. Stefania Albanesi & Roc Armenter, 2012. "Intertemporal Distortions in the Second Best," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1271-1307.
    3. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    4. Stefania Albanesi & Christopher Sleet, 2006. "Dynamic Optimal Taxation with Private Information," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 1-30.
    5. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2003. "Optimal Indirect and Capital Taxation," Review of Economic Studies, Oxford University Press, vol. 70(3), pages 569-587.
    6. Cremer, Helmuth & Gahvari, Firouz, 1996. "Tax evasion and the optimum general income tax," Journal of Public Economics, Elsevier, vol. 60(2), pages 235-249, May.
    7. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
    8. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
    9. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    10. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
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