Intertemporal Distortions in the Second Best

45 Pages Posted: 29 Nov 2007 Last revised: 29 Sep 2010

See all articles by Stefania Albanesi

Stefania Albanesi

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: November 2007

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 frontload distortions for this broad class of environments. A series of applications illustrates the significance of these findings.

Suggested Citation

Albanesi, Stefania and Armenter, Roc, Intertemporal Distortions in the Second Best (November 2007). NBER Working Paper No. w13629. Available at SSRN: https://ssrn.com/abstract=1033755

Stefania Albanesi (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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New York, NY 10027
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HOME PAGE: http://www.columbia.edu/~sa2310/

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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