Essays on Commitment and Optimal Public Policies

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Garon, Jean-Denis
Commitment , Taxation
We focus on the design of optimal policies in the event of commitment problems. In the first essay, we characterize how income should be redistributed within and across generations. The time-inconsistency problem arises when the government cannot commit to the future retirees' nonlinear tax schedule. Because retired individuals have revealed their private information during the active period of their lives, the government has an incentive to misuse it and to implement more redistribution than a regular second-best policy would prescribe. We study the set of equilibria that can be sustained if the government is infinitely lived, and the households are short-lived. Second, we derive an optimal linear pension scheme when individuals need forced savings as a commitment device. We do so with time-inconsistent preferences, whereby forced savings are the outcome of a paternalistic social welfare maximization process. We then derive the optimal scheme when individuals have self-control preferences.In both cases, we study the conflict between the forced-savings and redistributive roles of public pensions. We show that the non-paternalistic pension system may exhibit more forced savings and be less redistributive than the paternalistic one. The third essay analyzes whether centralizing or decentralizing the provision of public goods may influence the threats of secessions in a federation. We use a simple model with two regions, in which one of them may decide to secede even if it would be socially optimal, from the standpoint of the whole federation, to keep it united. Centralization offers both benefits and costs for individual regions. We show how centralizing generates a cost to secede if centralizing the provision of public goods requires an investment in joint institutions that cannot be perfectly recovered if the federation is dissolved. However, because a centralized provision of public goods does not match local preferences as well as a decentralized one, it also generates a long-run cost to remain in the federation.
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