NotesECN741-page21

# NotesECN741-page21 - ECN 741 Public Economics Fall 2008 sub...

This preview shows page 1. Sign up to view the full content.

This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ECN 741: Public Economics Fall 2008 sub. to p(st ) wt (st )(1 − τ (st ))y (st ) + R(st )k (st−1 ) − T p(st ) c(st ) + k (st ) ≤ t,st t,st i k i (s0 ) = k0 is given in which R(st ) = 1 + (1 − κ(st ))(rt (st ) − δ ) and T = t,st p(st )T (st ) is present value of lump-sum taxes. Note that there is heterogeneity in skills θi as well as initial capital holding k i (s0 ). Feasibility Let L(st ) = i π i y i (st ), C (st ) = i π i ci (st ), K (st ) = i π i k i (st ). Then feasibility is C (st ) + K (st ) + g (st ) = F (K (st−1 ), L(st ), st , t) + (1 − δ )K (st−1 ) (29) Govern met Government has exogenously given sequence of expenditure g (st ) to ﬁnance. It can levy linear tax on capital income κ(st ). It can also levy the following tax on income τ (st )wt (st )y i (st ) + T (st ) Government budget constraint is p(st ) τ (st )wt (st )L(st ) + κ(st )(rt (st ) − δ )K (st−1 ) p(st )g (st ) ≤ T + t,st (30) t,st F irms As usual the ﬁrm’s problem is static and implies marginal product pricing rt (st ) = Fk (K (st−1 ), L(st ), st , t) (31) wt (st ) = FL (K (st−1 ), L(st ), st , t) Equilibrium is deﬁned the usual way. Next we derive the implementability constraints. Werning (2007) develops a methodology that incorporates the fact that labor income taxes are uniform across types (so no extra constraint needs to be added to the optimal taxation problem). Also, he shows implementability constraints can be written only in terms of aggregates. 21 ...
View Full Document

## 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.

Ask a homework question - tutors are online