NotesECN741-page31

NotesECN741-page31 - ECN 741: Public Economics Fall 2008...

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ECN 741: Public Economics Fall 2008 l nt and θ nt are both private information but y nt is observable. In what follows we make a change of variable l nt = y nt θ nt . Definition 2 An allocation is a sequence of functions ( c n ,y n ) N n =1 c n : ( Θ T ) N -→ R T + y n : ( Θ T ) N -→ R T + such that c nt and y nt are ( θ t 1 ,...,θ t N ) - measurable. Denote the set of feasible allocation by FA . Definition 3 An allocation ( c n ,y n ) N n =1 is feasible if T X t =1 N X n =1 c nt ( θ T 1 ,...,θ T n ) R - t T X t =1 N X n =1 y nt ( θ T 1 ,...,θ T n ) R - t , R > 1 for all ( θ T 1 ,...,θ T n ) such that π ( θ T 1 ,...,θ T n ) > 0 . So far, we know the information structure, we know what allocations are and we know what allocations are feasible. But how does this guide towards a set of tax policies? In other
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