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Environment and Equilibrium

In: Taxation, Growth and Fiscal Institutions

Author

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  • Albert J. Lee

    (Summit Consulting LLC)

Abstract

This chapter models the connections between the redistributive tax rate and income inequality in a dynamic tax game embedded in an overlapping generation model with heterogeneous agents. In the first period, agents vote and work; in the second period, they consume. The source of heterogeneity within the same generation is endorsed due to differences in labor efficiency among the agents. The existence and stability of the political–economic equilibrium is shown to exist. In accordance to the wishes of the median voter, government redistributes the tax revenue completely to the young. This process is repeated in subsequent time periods. Each agent, based on his selection of policy, maximizes his lifetime indirect utility, subject to his personal constraints. Nash equilibria are sub optimal, under the assumption of sequential rationality. Hence, agents have an incentive to cooperate.

Suggested Citation

  • Albert J. Lee, 2012. "Environment and Equilibrium," SpringerBriefs in Business, in: Taxation, Growth and Fiscal Institutions, chapter 0, pages 5-19, Springer.
    • Handle: RePEc:spr:spbrcp:978-1-4614-1290-8_2
    DOI: 10.1007/978-1-4614-1290-8_2
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