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
ff
ective labor units given by
n
t
=
θ
t
c
t
where
θ
t
is skill and
c
t
is e
ff
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
)
dμ
) 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
)
dμ
+
K
t
+1
+
G
t
≤
F
(
K
t
,
Z
θ
t
n
t
(
θ
t
)
dμ
) + (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
T T
))
−
v
(
n
t
(
σ
TT
)
/θ
t
)
ª
dμ
≥
T
X
t
=1
β
t
−
1
Z
θ
t
{
u
(
c
t
(
σ
))
−
v
(
n
t
(
σ
)
/θ
t
)
}
dμ
where
σ
TT
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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- Spring '07
- CORBAE
- Operations Research, Inverse Euler equation, Dynamic Optimal Taxation, t+1, |t t t+1
-
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