Abstract
In this paper we develop a framework for determining optimal profit taxation for a welfare maximising government. We show that there is a dynamic trade off between public consumption now and in the future. Two possible solutions are derived. The first solution, which is the formal outcome of an open-loop Stackelberg equilibrium of a game between government and firms, is time-inconsistent. The second solution, which corresponds to a feedback Stackelberg equilibrium, is time-consistent, but yields a lower value of steady-state utility. The outcome of the feedback Stackelberg equilibrium depends on the number of firms in this economy. If the number of firms is large, this equilibrium coincides with the open-loop Nash equilibrium. Furthermore, we show the dynamic paths if the economy goes from its feedback to its open-loop steady-state.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
