Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/118009
Authors: 
Deissenberg, Christophe
Dawid, Herbert
Sevcik, Pavel
Year of Publication: 
2004
Series/Report no.: 
Nota di Lavoro, Fondazione Eni Enrico Mattei 137.2004
Abstract: 
We consider a simple dynamic model of environmental taxation that exhibits time inconsistency. There are two categories of firms, Believers, who take the tax announcements made by the Regulator to face value, and Non-Believers, who perfectly anticipate the Regulator's decisions, albeit at a cost. The proportion of Believers and Non- Believers changes over time depending on the relative profits of both groups. We show that the Regulator can use misleading tax announcements to steer the economy to an equilibrium that is Pareto superior to the solutions usually suggested in the literature. Depending upon the initial proportion of Believers, the Regulator may prefer a fast or a low speed of reaction of the firms to differences in Believers/Non-Believers profits.
Subjects: 
Environmental policy
Emissions taxes
Time inconsistency
Heterogeneous agents
Bounded rationality
Learning
Multiple equilibria
Stackelberg games
JEL: 
H23
H3
Q5
C69
C79
D62
Document Type: 
Working Paper

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