Taxation of capital gains at realization may distort individuals' decisions regarding holding or selling during an asset's lifetime. This creates the problem of designing a tax structure for capital gains so as to induce efficient patterns of holding an selling. Several tax structures are explored in this paper. Linear taxation, at rates which rise with the holding period, can achieve the first best, even under the conditions of limited information that we postulate. The form of the optimal tax is independent of the stochastic structure of rates of return. We also derive the optimal nonlinear tax under the constraint that it be independent of the holding period. Second-best tax rules are examined. Results in a two-period model are contrasted with those in a continuous time framework. Also treated is the case in which the returns to the asset under consideration depend on the aggregate quantity invested

Taxation of capital gains at realization may distort individuals' decisions regarding holding or selling during an asset's lifetime. This creates the problem of designing a tax structure for capital gains so as to induce efficient patterns of holding an selling. Several tax structures are explored in this paper. Linear taxation, at rates which rise with the holding period, can achieve the first best, even under the conditions of limited information that we postulate. The form of the optimal tax is independent of the stochastic structure of rates of return. We also derive the optimal nonlinear tax under the constraint that it be independent of the holding period. Second-best tax rules are examined. Results in a two-period model are contrasted with those in a continuous time framework. Also treated is the case in which the returns to the asset under consideration depend on the aggregate quantity invested

When a decision rule is implemented using a Bayesian incentive compatible mechanism in which the messages are publically obser vable, the players' information is augmented by their observation of each others' strategies. In this paper the authors study the set of Bayesian implementable decision rules which have the further property that the information c onveyed in the process of thier implementation does not invalidate the optimality of the players' strategies. Such rules are called posterior implementable. The authors concentrate on a two-person problem with two possible decisions and, for this problem, they obtain a complete characterization of the set of posterior implementable decision rules.

[The effects of an improvement in information on the efficiency of risk-bearing are studied under various systems of incomplete markets. With sequential futures markets for uncontingent delivery, the welfare effects are indeterminate in sign, except under special circumstances. In the presence of options markets, however, an improved information structure is almost surely beneficial.]

Tournaments, reward structures based on rank order, are compared with individual contracts in a model with one risk-neutral principal and many risk-averse agents. Each agent's output is a stochastic function of his effort level plus an additive shock term that is common to all the agents. The principal observes only the output levels of the agents. It is shown that, in the absence of a common shock, using optimal independent contracts dominates using the optimal tournament. Conversely, if the distribution of the common shock is sufficiently diffuse, using the optimal tournament dominates using optimal independent contracts. Finally, it is shown that for a sufficiently large number of agents, a principal who cannot observe the common shock but uses the optimal tournament does as well as one who can observe the shock and uses independent contracts.

Tournaments, reward structures based on rank order, are compared with individual contracts in a model with one risk-neutral principal and many risk-averse agents. Each agent's output is a stochastic function of his effort level plus an additive shock term that is common to all the agents. The principal observes only the output levels of the agents. It is shown that, in the absence of a common shock, using optimal independent contracts dominates using the optimal tournament. Conversely, if the distribution of the common shock is sufficiently diffuse, using the optimal tournament dominates using optimal independent contracts. Finally, it is shown that for a sufficiently large number of agents, a principal who cannot observe the common shock but uses the optimal tournament does as well as one who can observe the shock and uses independent contracts.

[Our tax system was designed for an economy with little or no inflation. The current paper shows that inflation causes capricious changes in the effective rate of tax on capital income and therefore in the real net rate of return that savers receive. This is not only a temporary disequilibrium effect but one which persists in steady-state equilibrium. Unlike earlier papers by Feldstein and by Green and Sheshinski, the current study recognizes that firms finance investment by both debt and equity in a ratio that depends on the tax rates and on the rate of inflation.]

Jerry Green, Françoise Schoumaker; Incentives in Discrete-time MDP Processes with Flexible Step-size, The Review of Economic Studies, Volume 47, Issue 3, 1 Apri

Jerry Green, Jean-Jacques Laffont; On Coalition Incentive Compatibility, The Review of Economic Studies, Volume 46, Issue 2, 1 April 1979, Pages 243–254, h