Macroeconomic Stabilization Through Taxation and Indexation: The use ofFirm-Specific Information

Richard C. Marston and Stephen J Turnovsky

No 1586, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper considers two alternative approaches to stabilizing an economy with firm-specific productivity disturbances. The first uses wage contracts tying wages in each firm to these disturbances as well as the price level. The second uses a tax on firms which modifies their supply behavior together with a simple waqe indexation rule tying wages to prices alone. Both these schemes are viable as long as the firm-specific disturbance is known to all agents. If the firm alone observes the productivity disturbance, under either scheme it has an incentive to misrepresent current conditions. However, a combination of these two schemes is both welfare maximizing and incentive compatible.

Date: 1985-03
Note: EFG
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Published as Marston, Richard C. and Stephen J. Turnovsky. "Macroeconomic Stabilization Through Taxation and Indexation: The Use of Firm-Specific Information," Journal of Monetary Economics, Vol. 16, No. 3, Nov. 1985, pp. 375-395.

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Journal Article: Macroeconomic stabilization through taxation and indexation: The use of firm-specific information (1985)
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