NotesECN741-page20

# NotesECN741-page20 - c be consumption and l be the hours...

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ECN 741: Public Economics Fall 2008 2.2.2 Non-Steady State Proposition 6 Suppose the utility function is of the form U ( c,l ) = c 1 - σ 1 - σ - v ( l ) , Then Ramsey taxes on capital income is zero for t 2 . Proof. Do it as an exercise. Exercise: Can you establish any connection between this result and uniform commodity taxation? 2.2.3 Werning (QJE, 2007) Werning ( 2007 ) studies a dynamic environment in which individuals are heterogeneous in their skills. Instead of ruling out lump-sum taxation, he allows them. However, he does not allow government to condition the lump-sum tax on individual skill. Instead he allows for a distortionary labor income (and capital income) tax that government can use to redistribute income across people with diﬀerent skill. In some sense, it is one step away from traditional Ramsey setup, towards rationalizing distortionary taxes. The environment is the following: let
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Unformatted text preview: c be consumption and l be the hours worked. Individual with skill θ who works l hours produce y = θl eﬃciency labor unit. If period utility over hours worked and consumption is U ( c,l ) , then we can write it in terms of consumption and eﬃciency labor unit as U i ( c,y ) = U ( c,y/θ i ) . Suppose there are θ ∈ Θ = ± θ i ,...,θ N ² . We call the individual of type θ i , person i or type i . The fraction of type i is π i . Assume ∑ i π i θ i = 1 . Aggregate state of economy is s t ∈ S (ﬁnite set) and is publicly observable. Denote the history of aggregate shocks by s t = ( s ,...,s t ) . Probability of history s t is Pr ( s t ) . Consumer problem Individual of type i solves max X t,s t β t Pr ( s t ) U i ( c t ( s t ) ,y ( s t )) (28) 20...
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## This note was uploaded on 12/10/2011 for the course MAT 121 taught by Professor Wong during the Fall '10 term at SUNY Stony Brook.

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