[A tractable dynamic general equilibrium model of continuous product innovation is developed. Patents, or any imitation lag, of infinite duration may achieve too much, too little, or the socially optimum level of innovation. Most surprising, finite-life patents may induce undamped oscillations in innovation.]

Many important questions in macroeconomics concern the impact of taxation and spending policies on private resource allocation. One approach, typified by Robert Hall (1971) and William Brock and Stephen Turnovsky (1981), is to use dynamic general equilibrium models to address basic issues in fiscal and tax policy. The objective is to explicitly examine macroeconomic issues without embracing the market imperfections (fixed prices, missing markets, money illusion, etc.) found in conventional macroeconomic analysis. There is currently great interest in dynamic fiscal policy problems. This decade has already seen two major adjustments in tax policy, and many attempts to substantially alter spending patterns. The result of this tumult has been unprecedented peacetime deficits and much uncertainty about what measures will ultimately be used to bring the budget into balance. In this paper, I discuss the impact of alternative fiscal policies in a dynamic general equilibrium model. I examine the shortrun effects of fiscal policy changes, the efficiency cost of alternative dynamic tax policies, the effects of uncertain policy formation, and the redistributive effects of factor taxation.

A key feature of modern dynamic economies is imperfect competition. Some imperfect competition is due to institutions such as patents and copy-rights that allow Þrms to exercise market power over the sale of products they invent. Some imperfect competition is due to various forms of increas-ing returns to scale and product differentiation. Since market power is an essential feature of innovation and growth in the new economy (as it was in the old economy) we need to know how imperfect competition affects the conventional wisdom on tax policy. We argue that it has particularly striking implications for the taxation of capital. The current consensus among economists is that investment should be lightly taxed with most tax revenues coming from labor and consumption taxation; see Kenneth L. Judd (1999) for a discussion of this literature. These analyses assume perfect competition in all markets. Even though imperfect competition is common, economists generally prefer competitive models since analyses with imperfect competition usually get mired in strategic details

This paper examines the marginal efficiency cost of various factor taxes in a dynamic general-equilibrium model. The au thor solves for the excess burden of anticipated and unanticipated, t emporary and permanent, tax policies. Using a range of estimates for taste and technology parameters, he finds excess burdens larger than those indicated by previous studies that use static models. These exc ess burdens are sensitive to parameter values and timing. However, th e rankings of alternative tax policies turn out to be insensitive to structural parameter values.

[It is shown that wquilibria with dispersed prices exist in environments with identical and rational agents on both sides of the market. In particular, the original Stigler model of nonsequential search often has many equilibria, some with price dispersion. Also, price dispersion holds in equilibrium in general if search is "noisy," i.e., there is some chance of learning two or more prices when an agent is looking for one price.]

We examine the impact of capital income taxation, both accrual forms of taxation and taxation of realized capital gains, on total savings and the demand for corporate financial instruments. We find that investors may hold both debt and equity in the face of effective collection of capital gains taxation even in a flat tax system. We also find that the two taxes will have substantially different effects on saving and consumption behavior, making it unlikely that the tax structure can be summarized by any single equivalent accrual tax rate.

We examine the impact of capital income taxation, both accrual forms of taxation and taxation of realized capital gains, on total savings and the demand for corporate financial instruments. We find that investors may hold both debt and equity in the face of effective collection of capital gains taxation even in a flat tax system. We also find that the two taxes will have substantially different effects on saving and consumption behavior, making it unlikely that the tax structure can be summarized by any single equivalent accrual tax rate.