handoutdyntax - Dynamic Optimal Taxation Follows...

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Dynamic Optimal Taxation Follows Kocherlakota, N. (2005) “Advances in Dynamic Optimal Taxa- tion” http:/ /www.econ.umn.edu/˜nkocher/london3.pdf 1 Environment T periods. E f ective labor units given by n t = θ t c t where θ t is skill and c t is e f ort θ t is an iid shock across agents. At the beginning of the period θ t is revealed. Let μ denote the prob distn over history θ t . ( θ t ,c t ) are private info but n t is observable. CRS technology F ( K t , R θ t n t ( θ t ) ) with initial capital given by K 0 . Preferences: E " T X t =1 β t 1 { u ( C t ) v ( c t ) } # Govt purchases G t 2 Equilibrium Defn. An allocation is resource feasible if Z θ t C t ( θ t ) + K t +1 + G t F ( K t , Z θ t n t ( θ t ) )+(1 δ ) K t Defn. An allocation is incentive compatible if T X t =1 β t 1 Z θ t © u ( C t ( σ TT )) v ( n t ( σ ) t ) ª T X t =1 β t 1 Z θ t { u ( C t ( σ )) v ( n t ( σ ) t ) } where σ denotes the truthtelling reporting strategy and σ denotes any other report. Defn. An allocation which is incentive compatible and resource feasible is called incentive feasible .
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This note was uploaded on 08/06/2008 for the course ECON 387 taught by Professor Corbae during the Spring '07 term at University of Texas at Austin.

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handoutdyntax - Dynamic Optimal Taxation Follows...

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