Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting

33 Pages Posted: 28 Feb 2001

See all articles by Per Krusell

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Burhanettin Kuruscu

University of Toronto - Department of Economics

Anthony A. Smith

Yale University - Cowles Foundation

Multiple version iconThere are 2 versions of this paper

Date Written: February 2001

Abstract

We consider a representative-agent equilibrium model where the consumer has quasi-geometric discounting and cannot commit to future actions. With restricted attention to a parametric class for preferences and technology logarithmic utility, Cobb-Douglas production and full depreciation we solve for time-consistent competitive equilibria globally and explicitly. For this class, we characterize the welfare properties of competitive equilibria and compare them to that of a planning problem. The planner is a consumer representative who, without commitment but in a time-consistent way, maximizes his present-value utility subject to resource constraints. The competitive equilibrium results in strictly higher welfare than does the planning problem whenever the discounting is not geometric. We also explicitly consider taxation in our environment. With a benevolent government that can tax income and capital but cannot commit its future tax rates, time-consistent taxation leads to positive tax rates on capital. These tax rates reproduce the central planning solution, and thus imply a worse outcome in welfare terms than when there is no government.

Keywords: Quasi-Geometric Discounting, Time Inconsistency, Welfare

JEL Classification: D60, E21, H21

Suggested Citation

Krusell, Per L. and Kuruscu, Burhanettin and Smith, Anthony A., Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting (February 2001). CEPR Discussion Paper No. 2693. Available at SSRN: https://ssrn.com/abstract=261865

Per L. Krusell (Contact Author)

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Burhanettin Kuruscu

University of Toronto - Department of Economics ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://https://sites.google.com/site/bkuruscu

Anthony A. Smith

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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