Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game
Universities of Marseille - University of the Mediterranean - Aix-Marseille II
University of Bielefeld - Department of Business Administration and Economics
University of Aix-Marseille II
FEEM Working Paper No. 137.04
We consider a simple dynamic model of environmental taxation that exhibits time inconsistency. There are two categories of firms, Believers, who take the tax announcements made by the Regulator to face value, and Non-Believers, who perfectly anticipate the Regulator's decisions, albeit at a cost. The proportion of Believers and Non-Believers changes over time depending on the relative profits of both groups. We show that the Regulator can use misleading tax announcements to steer the economy to an equilibrium that is Pareto superior to the solutions usually suggested in the literature. Depending upon the initial proportion of Believers, the Regulator may prefer a fast or a low speed of reaction of the firms to differences in Believers/Non-Believers profits.
Number of Pages in PDF File: 30
Keywords: Environmental policy, Emissions taxes, Time inconsistency, Heterogeneous agents, Bounded rationality, Learning, Multiple equilibria, Stackelberg games
JEL Classification: H23, H3, Q5, C69, C79, D62working papers series
Date posted: November 13, 2004
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