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Intertemporal distortions in the second best

Albanesi, Stefania; Armenter, Roc

We consider a very general class of public finance problems that encompasses Ramsey models of optimal taxation as well as economies with limited commitment, private information, and political economy frictions. 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.

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Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 0708-08
Published Here
March 28, 2011

Notes

November 2007

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