Professor John Hassler, IIES, Stockholm University, http://hassler-j.iies.su.se/COURSES/

1. New dynamic public finance (John Hassler)

The key problem we will study is when the planner wants to redistribute from high ability to low ability individuals and or provide a public good but has imperfect information of the true ability of individuals. We will start with a traditional approach where taxes are restricted to be linear and lump sum individual specific transfers are not allowed. After that we will remove this restrictions and instead model micro-foundations for why any type specific tax cannot be implemented. Instead we assume that the planner/government cannot observe ability and effort of individuals so that the latter can pretend to be someone else. By doing so, a better understanding of the fundamental trade-off between incentives and redistribution can be achieved. The static analysis of this problem starts with the classic Mirrlees model. We will then study more recent results in an emerging literature called the “New Dynamic Public Finance”.

Requirements:

1 Introductory graduate macroeconomics.

2 Dynamic optimization – knowledge of standard dynamic programming.

Notes:

I will follow fairly my fairly extensive notes during the course. It is likely to be useful to print and bring the notes to class. Notes will be posted here in pdf

Starred articles below are recommended to everyone.

1. Optimal Linear Taxes

*Atkinson, A, and J. Stiglitz, (1980), Lectures on Public Economics, McGraw-Hill, chapter 12.

*Sheshinski, E.,, 1972, “The Optimal Linear Income Tax”, Review of Economics Studies, 39

2. Static Mirrless models

*Stigliz, Joseph, 1987, “Pareto Efficient and Optimal Taxation and the New New Welfare Economics”, NBER Working Paper #2189

Mirrlees, James A. 1971. “An Exploration in the Theory of Optimum Income Taxation”, Review of Economic Studies 38(2): 175–208

Saez, Emmanuel, (2001), “Using Elasticities to Derive Optimal Income Tax Rates”, Review of Economic Studies 68 (1), 205–229.

3. Dynamic models

*Golosov, Mikhail, Aleh Tsyvinski and Iván Werning, “New Dynamic Public Finance: A User’s Guide”, Chapter in NBER Macroeconomics Annual 2006, Volume 21 (2007), Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors (p. 317 - 388)

*Golosov, Mikhail, and Aleh Tsyvinski, (2006), “Designing Optimal Disability Insurance”, Journal of Political Economy, 114:2.

Albanesi, Stefania; Sleet, Christopher, “Dynamic Optimal Taxation with Private Information”, Review of Economic Studies”, January 2006, v. 73, iss. 1, pp. 1-30

Golosov, M., N. Kocherlakota, and A. Tsyvinski (2003), “Optimal Indirect and Capital Taxation”. Review of Economic Studies 70, 569-588

Kocherlakota, Narayana R. 2005, “Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation”, Econometrica 73(5): 1587–162

Townsend, Robert , (1982), “Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information,” The Journal of Political Economy, Vol. 90, No. 6

Kapička, Marek, 2006, "The Dynamics of Optimal Taxation when Human Capital is Endogenous”, mimeo, UCSB.

4. Time Consistency

*Roberts, Kevin, (1984), “Theoretical Limits to Redistribution”, Review of Economic Studies, 51:177-95.

Acemogly, Daron, Mikhail Golosov, and Aleh Tsyvinski, (2006), “Markets versus Governments: Political Economy of Mechanisms”, mimeo, MIT.

Kapička, Marek, 2005, “Efficient Allocations in Dynamic Private Information Economies with Persistent Shocks: A First Order Approach”, mimeo, UCSB.