Working Paper: NBER ID: w13629
Authors: Stefania Albanesi; Roc Armenter
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 frontload distortions for this broad class of environments. A series of applications illustrates the significance of these findings.
Keywords: intertemporal distortions; second best economies; optimal 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 |
|---|---|
| Allocation satisfying admissibility constraints (C78) | Temporary intertemporal distortions (D15) |
| Future admissibility constraints stop binding (D10) | Temporary intertemporal distortions (D15) |
| Possibility to frontload all distortions (C69) | Future admissibility constraints stop binding (D10) |
| Private information (D82) | Permanent intertemporal distortions (D15) |
| Sufficient condition of admissible allocations (D10) | Temporary intertemporal distortions (D15) |