Time consistent taxation by a government with redistributive goals

David Pearce, Ennio Stacchetti

    Research output: Contribution to journalArticle

    Abstract

    In a dynamic economy whose government is interested in both equity and efficiency, time consistency problems arise even if the government has access to nondistortionary tax instruments. Moral hazard in production leads to a nondegenerate distribution of income, which the government would like to "flatten" ex post. Self-enforcing social agreements can mitigate the tendency toward excessive redistribution. We investigate the nature of the distortions caused by the time consistency problem, and show that in the constrained-optimal equilibrium, usually alineartax schedule is imposed. This remains true if renegotiation of the social agreement is possible.Journal of Economic LiteratureClassification Numbers: C7 C73, E6, H21.

    Original languageEnglish (US)
    Pages (from-to)282-305
    Number of pages24
    JournalJournal of Economic Theory
    Volume72
    Issue number2
    DOIs
    StatePublished - Feb 1997

    ASJC Scopus subject areas

    • Economics and Econometrics

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