Time Inconsistency in Environmental Policy: Tax Earmarking as a Commitment Solution

Laura Marsiliani and Thomas I Renstrom

Economic Journal, 2000, vol. 110, issue 462, C123-38

Abstract: Tax earmarking imposes a constraint on government policymaking, and may be desirable if it solves a time-inconsistency problem in tax policy. In a two-period economy, in which the policy decisions regarding taxes, public goods provision, and pollution abatement are taken by a majority-elected individual, we show how the time-inconsistency problem in environmental policy arises. We demonstrate that the commitment equilibrium under no earmarking rules cannot be as fully implemented as a no-commitment equilibrium under earmarking rules. However, the earmarking rules do act as a partial commitment mechanism.

Date: 2000
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