Optimal policy with credibility concerns

Yang K. Lu

Journal of Economic Theory, 2013, vol. 148, issue 5, 2007-2032

Abstract: This paper considers a reputation model of optimal taxation in which the public is unsure about the government type. A long-lived government can be trustworthy (meaning that it commits to its announced tax rate) or opportunistic (meaning that it retains the ability to change its tax rate after announcing it). Unlike in most prior studies, the committed strategy in this model is optimally chosen by the trustworthy type. We show that this change has significant consequences for the equilibrium dynamics. The optimal committed strategy is found to vary with the time preferences of the two government types, the initial reputation of the government, and the elasticity of household production. This formulation explains differences in policy responses across governments in the face of similar credibility problems.

Keywords: Imperfect credibility; Reputation game; Optimal taxation; Time inconsistency (search for similar items in EconPapers)
JEL-codes: D82 E61 E62 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053113000811
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:148:y:2013:i:5:p:2007-2032

DOI: 10.1016/j.jet.2013.04.015

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().