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Constraints On Income Distribution And Production Efficiency In Economies With Ramsey Taxation

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Executive Summary

The authors study the link between second-best production efficiency and the constraints on income distribution imposed by private ownership of firms in economies with Ramsey taxation. They review the result of Dasgupta and Stiglitz [1972], Mirrlees [1972], Hahn [1973], and Sadka [1977] about firm-specific profit taxation leading to second-best production efficiency. Problems in the proofs of this result in these papers have been identified by Reinhorn [2005]. They provide an alternative, and with some hope a more intuitive, proof of this result. The mechanism employed in the proof is also used to show second-best production efficiency under some configurations of private ownership without any (or at best, uniform) profit taxation.

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