Review of Economic Studies Vol. 79 No. 4 2012
Intertemporal Distortions in the Second Best
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.
- DOI
- 10.1093/restud/rds014
- Volume
- 79
- Issue
- 4
- Pages
- 1271-1307
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref