NotesECN741-page19

NotesECN741-page19 - ECN 741: Public Economics Fall 2008...

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ECN 741: Public Economics Fall 2008 FOC implies U ct U lt = - (1 - τ lt ) w t p t v t = p t +1 v t +1 + p t +1 (1 - τ dt +1 ) d t +1 And therefore implementability constraint is X t =0 β t [ U ct c t + U lt l t ] = U c 0 [ v 0 + (1 - τ d 0 ) d 0 ] s 0 (27) There is a corporation that maximizes the present discounted value of owners’ dividends and pays taxes τ t on corporate income. max X t =0 p t (1 - τ dt ) d t subject to d t = f ( k t ,l t ) - x t - w t l t - τ t ( f ( k t ,l t ) - δk t - w t l t ) k t +1 = (1 - δ ) k t + x t First order conditions for the corporation is f lt = w t p t (1 - τ dt ) p t +1 (1 - τ dt +1 ) = 1 - (1 - τ t +1 )( f kt +1 - δ ) For this economy the feasibility is c t + k t +1 + g t = f ( k t ,l t ) + (1 - δ ) k t s t = 1 and there is also a government budget constraint
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