Stéphane Gauthier

Dynamic Equivalence Principle In Linear Rational Expectations Models

Linear models with infinite horizon generally admit infinitely many rational expectations solutions. Consequently, some additional selection devices are needed to narrow the set of relevant solutions. The viewpoint of this paper is that a solution will be more likely to arise if it is locally determinate (i.e., locally isolated), locally immune to sunspots, and locally stable under learning. These three criteria are applied to solutions of linear univariate models along which the level of the state variable evolves through time. In such models the equilibrium behavior of the level of the state variable is described by a linear recursive equation characterized by the set of its coefficients. The main innovation of this paper is to define new perfect-foresight dynamics whose fixed points are these sets of coefficients, thus allowing us to study the property of determinacy of these sets, or, equivalently, of the associated solutions. It is shown that only one solution is locally determinate in the new dynamics. It is also locally immune to sunspots and locally stable under myopic learning. This solution corresponds to the saddle path in the saddle-point case.

Redistribution by Means of Lotteries

A government designs transfers to agents in the absence of information on their preferences. The second-best allocation is equal sharing among citizens when the awards are deterministic. We provide a necessary and sufficient condition under which lotteries improve upon the egalitarian outcome. The condition requires that the citizens with large social weights have low risk aversion, and that the left tail of the distribution of risk aversion be sufficiently dispersed.

Learning and the saddle point property

This note shows that there are close connections between the determinacy of a stationary state equilibrium and its stability under learning whenever agents try to estimate both the law of motion of the state variable and the stationary state value.

How incentives matter ? An illustration from the Targeted Subsidies reform in Iran

We use the targeted subsidies reform implemented in Iran in 2011 to recover empirically the social valuations of Iranian households relying on the assumption of optimal consumption and income taxes, for welfarist and non-welfarist poverty alleviation social criteria. Unlike the existing literature, we do not restrict attention to a specific pattern for the incentive constraints implied by nonlinear income taxation. Instead we recover this pattern by estimating the Lagrange multipliers associated with the incentive constraints. Before the reform we find evidence of redistribution toward the bottom poor income deciles that is limited by an incentive constraint where the rich envy the social treatment of the poor. At the outcome of the reform incentives no longer matter and the social welfare function of the government of Iran displays a Benthamite-like form.

Production Efficiency and Profit Taxation

Consider a simple general equilibrium economy with one representative consumer, a single competitive firm and the government. Suppose that the government has to finance public expenditures using linear consumption taxes and/or a lump-sum tax on profits redistributed to the consumer. We show that, if the tax rate on profits cannot exceed

Optimal indirect taxation with a restricted number of tax rates

100\%

Optimal commodity grouping in a partial equilibrium framework

100%, one cannot improve upon the second-best optimum of an economy with constant returns to scale by using a less efficient profit-generating decreasing returns to scale technology.