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dc.contributor.authorSaint-Paul, Gillesen_US
dc.date.accessioned2009-01-28T15:05:00Z-
dc.date.available2009-01-28T15:05:00Z-
dc.date.issued2007en_US
dc.identifier.urihttp://hdl.handle.net/10419/17927-
dc.description.abstractEconomists traditionally tackle normative problems by computing optimal policy, i.e., the one that maximizes a social welfare function. In practice, however, a succession of marginal changes to a limited number of policy instruments are implemented, until no further improvement is feasible. I call such an outcome a ?restricted local optimum?. I consider the outcome of such a tatonment process for a government which wants to optimally set taxes given a tax code with a fixed number of brackets. I show that there is history dependence, in that several local optima may be reached, and which one is reached depends on initial conditions. History dependence is stronger (i.e. there are more local optima), the more complex the design of economic policy, i.e. the greater the number of tax brackets. It is also typically stronger, the greater the interaction of policy instruments with one another – which in my model is equivalent to agents having a more elastic labor supply behavior. Finally, for a given economy and a given tax code, I define the latter?s average performance as the average value of the social welfare function across all the local optima. One finds that it eventually sharply falls with the number of brackets, so that the best performing tax code typically involves no more than three brackets.en_US
dc.language.isoengen_US
dc.publisherKiel Institute for the World Economy (IfW) Kiel-
dc.relation.ispartofseriesEconomics Discussion Papers / Institut für Weltwirtschaft 2007-4en_US
dc.subject.jelJ22en_US
dc.subject.jelH21en_US
dc.subject.jelH2en_US
dc.subject.ddc330en_US
dc.subject.keywordComplexityen_US
dc.subject.keywordOptimal taxationen_US
dc.subject.keywordbouded rationalityen_US
dc.subject.keywordlearningen_US
dc.subject.keywordmultiple equilibriaen_US
dc.subject.keywordpath dependenceen_US
dc.titleThe complexity of economic policy: restricted local optima in tax policy designen_US
dc.typeWorking Paperen_US
dc.identifier.ppn557919428en_US
dc.rights.licensehttp://creativecommons.org/licenses/by-nc/2.0/de/deed.en-
dc.identifier.repecRePEc:zbw:ifwedp:5518-
Appears in Collections:Economics: The Open-Access, Open-Assessment E-Journal - Discussion Papers

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