This paper solves an often neglected problem of efficient taxation where the policymaker is interested in minimizing the dead weight burden imposed on the society by labor income taxes. Specifically, it argues that the efficient tax function assumes the form of a step function. Furthermore, it...

Human beliefs, while always remaining in equilibrium, serve as a an equilibrium selector and determine the degree of aggregate volatility. Fully rational and risk averse economic agents expect macro-level dynamics to be characterized by a specific degree of volatility. Given this expectation the...

In a general equilibrium model with fully rational agents and built in micro-level uncertainty we show that debt financed government spending on consumption can be welfare improving at all horizons despite the fact that it inhibits the process of physical capital formation. In addition, we show...

We construct a novel model of equilibrium unemployment. Specifically, in a dynamic micro based model, we illustrate that rational and profit maximizing firms can choose to pay wages that exceed the market clearing level to restrict competition. Resulting unemployment and above market clearing...

In this paper we model the process of international investment flows when agents face strategic motives. We show that domestic agents' expectations about the behavior of foreign investors are crucial in the process of the determination of the equilibrium of the domestic economy. Specifically, we...

In this paper we extend the dimensionality of the standard income taxation problem. Specifically, we allow agents to purchase at a price, from the government, discounts on their marginal tax rates. Consequently agents have two decision variables: the level of income they choose to earn and the...

Fully rational agents are allowed to optimize over expectations formation technologies in an environment where it is costly to collect and process information. It is shown in a general equilibrium framework that optimization over expectations by rational and forward-oriented agents can lead to...

The paper develops a model of sudden reversals of in foreign investment flows. The paper suggests that microlevel incentives and microlevel decisions stand at the root of investment crises. Specifically, we argue that if high quality projects are in limited supply and foreign investors are not...

The paper analyzes, in a general equilibrium framework under the assumption of fixed costs and microlevel uncertainty, the impact of transitory aggregate shocks on the behavior of macroeconomic variables. We establish that transitory shocks can have persistent effects and can cause significant...

In this paper, we describe an elementary, fully implementable, and revenue neutral randomizing mechanism that leads to a Pareto improvement over allocations induced by labor income tax functions. We illustrate, by providing a theoretical example, that our mechanism can be applied to optimal tax...