Optimal Fiscal Policy with Endogenous Product Variety / Sanjay K. Chugh, Fabio Ghironi.

Format:

Book

Author/Creator:

Chugh, Sanjay K.

Contributor:

National Bureau of Economic Research.

Ghironi, Fabio.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17319.

NBER working paper series no. w17319

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

We study Ramsey-optimal fiscal policy in an economy in which product varieties are the result of forward-looking investment decisions by firms. There are two main results. First, depending on the particular form of variety aggregation in preferences, firms' dividend payments may be either subsidized or taxed in the long run. This policy balances monopoly incentives for product creation with consumers' welfare benefit of product variety. In the most empirically relevant form of variety aggregation, socially efficient outcomes entail a substantial tax on dividend income, removing the incentive for over-accumulation of capital, which takes the form of variety. Second, optimal policy induces dramatically smaller, but efficient, fluctuations of both capital and labor markets than in a calibrated exogenous policy. Decentralization requires zero intertemporal distortions and constant static distortions over the cycle. The results relate to Ramsey theory, which we show by developing welfare-relevant concepts of efficiency that take into account product creation.

Notes:

Print version record

August 2011.