Working Paper: CEPR ID: DP6577
Authors: Stefania Albanesi; Roc Armenter
Abstract: We consider a very general class of public finance problems that encompasses the Ramsey model of optimal taxation as well as economies with limited commitment, private information, and political economy frictions, and allows for incomplete markets. We identify a sufficient condition to rule out permanent intertemporal distortions at the optimum. If there exists an admissible allocation that converges to the first best steady state, then all intertemporal distortions are temporary in the second best. We analyze a series of applications to illustrate the significance of this result.
Keywords: intertemporal distortions; optimal dynamic taxation
JEL Codes: E6; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Existence of an admissible allocation that converges to the first best steady state (D51) | All intertemporal distortions in the second best are temporary (H21) |
| Candidate optimum exhibiting an intertemporal wedge (D15) | Reallocating resources over time yields first-order welfare gains (D61) |
| Economies with limited commitment constraints (D51) | Continuation value of the second best allocation must exceed the outside option at every date and state (D61) |
| Private information in economies (D89) | Permanent intertemporal distortions are a fundamental feature (D15) |