Markov-Perfect Optimal Taxation

Salvador Ortigueira

Review of Economic Dynamics, 2006, vol. 9, issue 1, 153-178

Abstract: In this paper we study optimal taxation in a dynamic game played by a sequence of governments and a private sector composed of a continuum of households. We focus on the Markov-perfect equilibrium of this game under two different assumptions on the extent of government's intra-period commitment, which in turn define two notions of time consistency of the Markov policy. Our results show that the extent of government's intra-period commitment has important quantitative implications for policies, welfare, and macroeconomic variables, and consequently that it must be explicitly stated as one of the givens of the economy, alongside preferences, markets and technology. We see this as an important result, since most of the previous literature on Markovian optimal taxation has assumed, either interchangeably or unnoticeably, different degrees of government's intra-period commitment. (Copyright: Elsevier)

Keywords: Markov-perfect optimal taxation; Time-consistent policies; Instantaneous and non-instantaneous commitment; Numerical methods (search for similar items in EconPapers)
JEL-codes: E61 E62 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (60)

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DOI: 10.1016/j.red.2005.10.001

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