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Optimal Household Behaviour under Taxation - a Two-Stage Dynamic Programming Approach

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  • Stern, Victor

Abstract

This paper presents a method of solving a practical optimization problem which arose in the context of private households' reactions to income tax levied from couples. Since the problem of constrained maximization of the household's life-time utility function in n prospective periods is complicated and sizeable, a two-stage dynamic programming approach is proposed. Splitting the problem into two-sub problems: finding the optimum policy and approximation in the policy space, is based on the dynamic nature of problems of this type, which can be seen as a multi-period decision process. Some provisional results obtained by experimental application appear to be sufficiently promising to justify elaboration.

Suggested Citation

  • Stern, Victor, 1980. "Optimal Household Behaviour under Taxation - a Two-Stage Dynamic Programming Approach," Econometric Institute Archives 272266, Erasmus University Rotterdam.
    • Handle: RePEc:ags:eureia:272266
    DOI: 10.22004/ag.econ.272266
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