Stefania Albanesi: Research
Intertemporal Distortions in the Second Best
Stefania Albanesi, Columbia University, NBER and CEPR
Roc Armenter, Federal Reserve Bank of Philadelphia
Current version: August 2011 (First version: November 2007)
Abstract
This paper studies
the long run properties of intertemporal distortions in a broad class of second
best economies. Our unified framework encompasses and extends many well known
models, such as variants of the Ramsey taxation model with aggregate or
idiosyncratic risk, and economies with incentive compatibility constraints due
to limited commitment, political economy, self-enforcement or private
information, or combinations of these. We identify a sufficient condition that
rules out permanent intertemporal distortions: If there exists an allocation
that satisfies all constraints and eventually converges to the limiting first
best allocation, then intertemporal distortions are temporary in the second
best. This result uncovers a common optimality principle linking the
intertemporal allocation of resources with the ability to front-load
distortions for this broad class of environments. A series of applications
illustrates the significance of these findings.
JEL Classification:
E6, H21, H3
Keywords: Intertemporal distortions; Second best; Ramsey policies; Limited commitment; Private information; Self-enforcement constraints; Dynamic contracting.
Older
versions: May 2010, NBER WP 13629, CEPR
DP 6577
Last updated: 8/31/2011.