Journal Article

Dynamic Mirrlees Taxation under Political Economy Constraints

Daron Acemoglu, Mikhail Golosov and Aleh Tsyvinski

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 77, issue 3, pages 841-881
Published in print July 2010 | ISSN: 0034-6527
Published online July 2010 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00587.x
Dynamic Mirrlees Taxation under Political Economy Constraints

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We study the structure of non-linear taxes in a dynamic economy subject to political economy problems. In contrast to existing literature, taxes are set by a self-interested politician, without any commitment power, who is partly controlled by the citizens. We prove that: (1) a version of the revelation principle applies; and (2) the provision of incentives to politicians can be separated from the provision of incentives to individuals. Using these results, we provide conditions under which distortions created by political economy problems persist or disappear. We then extend these results to environments with partially benevolent governments and potential ex post conflict among the citizens.

Journal Article.  19729 words.  Illustrated.

Subjects: Economics

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