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dc.contributor.authorBRENDON, Charles
dc.contributor.authorELLISON, Martin
dc.date.accessioned2014-09-25T12:12:48Z
dc.date.available2014-09-25T12:12:48Z
dc.date.issued2014
dc.identifier.issn1830-7728
dc.identifier.urihttp://hdl.handle.net/1814/32832
dc.description.abstractWe propose a new normative approach to designing institutional commitments in environments that are subject to a time inconsistency problem, à la Kydland and Prescott (1977). This approach captures the idea that institutions should be chosen in a way that is time consistent: if a commitment is found to be best in some sense today, it should remain best in the same sense tomorrow. This property is not satisfied by the usual Ramsey plan, but it can be achieved by placing appropriate restrictions on the choice set of possible commitments. Using a canonical capital tax problem as a laboratory, we consider the implications for institutional design of restricting choice to sets that exhibit this form of time consistency. We show that any optimal plan within a time-consistent choice set must converge to a steady state that differs from the long-run outcome under Ramsey policy. In particular, this outcome exhibits positive long-run capital taxes. This occurs because a time-consistent policy cannot have both high initial capital taxes and zero long-term rates. A policymaker who discounts the future will always be willing to accept long-run distortions in order to tax the inelastic initial capital stock.en
dc.format.mimetypeapplication/pdf
dc.language.isoenen
dc.relation.ispartofseriesEUI MWPen
dc.relation.ispartofseries2014/21en
dc.rightsinfo:eu-repo/semantics/openAccessen
dc.rightsinfo:eu-repo/semantics/openAccess
dc.subjectInstitutional designen
dc.subjectTime inconsistencyen
dc.subjectCommitment policyen
dc.subjectCapital taxationen
dc.subjectE61en
dc.subjectE62en
dc.subjectH21en
dc.titleTime-consistent institutional designen
dc.typeWorking Paperen
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