Money and Taxes Implement Dynamic Optimal Mechanisms

Bruno Biais, Hans Gersbach, Jean Rochet, Ernst-Ludwig von Thadden and Stéphane Villeneuve
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Bruno Biais: HEC Paris
Stéphane Villeneuve: University of Toulouse 1

No 1490, HEC Research Papers Series from HEC Paris

Abstract: We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. Incentive compatibility requires that agents bear part of their idiosyncratic risk. The larger the agents' risk exposure, the larger the rents the principal can extract from them. The optimal mechanism can be implemented as the equilibrium of a market where agents exchange goods for money, needed to pay taxes. Inflation affects agents' portfolio choice between risky capital and safe money. To implement the optimal mechanism, the principal targets an inflation rate such that agents' risk exposure is the same in equilibrium and in the mechanism.

Keywords: Money; Taxes; Mechanism Design; Incentive Compatibility; Inflation (search for similar items in EconPapers)
JEL-codes: D50 D80 E50 G11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2023-09-22
New Economics Papers: this item is included in nep-des and nep-mic
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Working Paper: Money and Taxes Implement Dynamic Optimal Mechanisms (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1490

DOI: 10.2139/ssrn.4571768

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