NotesECN741-page59

NotesECN741-page59 - ( θ t +1 ))(1-δ + F K ( K * t +1 ,Y...

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

View Full Document Right Arrow Icon
ECN 741: Public Economics Fall 2008 in deriving the inverse Euler equation depends crucially on additive separability. If the preferences are of the form u ( c,l ) = c 1 - σ 1 - σ v ( l ) then the proof presented will not work. See Farhi and Werning ( 2008 ) for derivation of the inter-temporal optimality condition for larger class of preferences (including those that are consistent with balanced growth). 3.2 Implementing Efficient Allocations 3.2.1 Wedges and Taxes So far we have shown that efficient allocations must satisfy a condition like the following (if there is no aggregate shock) β (1 - δ + F K ( K * t +1 ,Y * t )) u 0 ( c * t ( θ t )) = E ± 1 u 0 ( c * t +1 ( θ t +1 )) ² ² ² ² θ t +1 ³ . We also showed that this implies the following u 0 ( c * t ( θ t )) < β E ´ u 0 ( c * t +1
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ( θ t +1 ))(1-δ + F K ( K * t +1 ,Y * t )) ² ² θ t +1 µ . In other words there is an inter-temporal wedge 1-τ t = u ( c * t ( θ t )) β E ´ u ( c * t +1 ( θ t +1 ))(1-δ + F K ( K * t +1 ,Y * t )) ² ² θ t +1 µ < 1 . But does this mean that the efficient allocations can be implemented by a positive tax on capital? Two period example Consider the following example: • T = 2 . • Θ = { , 1 } , π ( θ 1 = 1) = 1 , π ( θ 2 = (1 , 1)) = 0 . 5 and π ( θ 2 = (1 , 0)) = 0 . 5 . (Note that this implies y 2 h = y 2 ((1 , 1)) = l 2 h (1 , 1) and y 2 l = y 2 ((1 , 0)) = 0 ) 59...
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