Intertemporal Distortions in the Second Best
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 front-load distortions for this broad class of environments. A series of applications illustrates the significance of these findings. Copyright , Oxford University Press.
Year of publication: |
2012
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Authors: | Albanesi, Stefania ; Armenter, Roc |
Published in: |
Review of Economic Studies. - Oxford University Press. - Vol. 79.2012, 4, p. 1271-1307
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Publisher: |
Oxford University Press |
Saved in:
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