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Intertemporal Distortions in the Second Best

Stefania Albanesi () and Roc Armenter ()

Review of Economic Studies, 2012, vol. 79, issue 4, 1271-1307

Abstract: This paper studies the long-run properties of intertemporal distortions in a broad class of second-best economies. Our unified framework encompasses and extends many well-known models, such as variants of the Ramsey taxation model with aggregate or idiosyncratic risk, and economies with incentive compatibility constraints due to limited commitment, political economy, self-enforcement or private information, or combinations of these. We identify a sufficient condition that rules out permanent intertemporal distortions: if there exists an allocation that satisfies all constraints and eventually converges to the limiting first-best allocation, then intertemporal distortions are temporary in the second best. This result uncovers a common optimality principle linking the intertemporal allocation of resources with the ability to front-load distortions for this broad class of environments. A series of applications illustrates the significance of these findings. Copyright , Oxford University Press.

Date: 2012
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Working Paper: Intertemporal Distortions in the Second Best (2007) Downloads
Working Paper: Intertemporal Distortions in the Second best (2007) Downloads
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