Sevin Yeltekin

Optimal taxation with endogenously incomplete debt markets

Abstract Empirical analyses of labor tax and public debt processes provide prima facie evidence for imperfect government insurance. This paper considers a model in which the governments inability to commit to future policies or to report truthfully its spending needs renders government debt markets endogenously incomplete. A method for solving for optimal fiscal policy under these constraints is developed. Such policy is found to be intermediate between that implied by the complete insurance (Ramsey) model and a model with exogenously incomplete debt markets. In contrast to optimal Ramsey policy, optimal policy in this model is consistent with a variety of stylized fiscal policy facts such as the high persistence of labor tax rates and debt levels and the positive covariance between government spending and the value of government debt sales.

Computing equilibria of dynamic games

This paper develops a numerical method for computing equilibria of dynamic games with state variables, and applies it to an oligopoly game with endogenous productive capacity. Our algorithm allows us to study the nature of cooperation and examine how the ability to collude is affected by state variables, such as current capacity. We study whether investment decisions increase the gains from cooperation, or present opportunities to deviate from collusive agreements and reduce the potential for cooperation. Our results indicate that there is rich set of equilibrium outcomes that had not been discovered due to restrictive assumptions made in earlier papers. These include asymmetric equilibria where market power fluctuates between firms and equilibria in which firms do strive for cooperation after a phase of uncooperative behavior that involves over investment and over production. The results indicate that restricting attention to symmetric Markov equilibria eliminates rich and interesting outcomes that shed light on the nature of collusion and cooperation, as the nature of cooperation evolves with the history of firm interaction and investment.

Dynamic labor contracts with temporary layoffs and permanent separations

Summary. We study the implications of optimal dynamic contracts in private information environments for fluctuations in effort and employment across time and productivity states. To this end, we incorporate temporary layoffs and permanent separations as well as on-the-job effort variations into a dynamic model of moral hazard. We consider two different “commitment” environments. In a “full commitment” environment, although the firm can temporarily lay a worker off, neither party can dissolve the contractual relationship once it has been initiated. On the other hand, in a “limited commitment” environment, both parties can dissolve the relationship at the beginning of any period in order to pursue an outside option.We use our model to study the implications of optimal contracts for incentives, employment histories, layoffs and separations across full information, full commitment and limited commitment settings. We compute solutions to the relevant principal-agent problems, endogenously determining the set of states in which separations occur and the domain of the firms value function, as well as the value function itself.