TY - JOUR AU - Acemoglu,Daron AU - Golosov,Michael AU - Tsyvinski,Aleh TI - Markets Versus Governments: Political Economy of Mechanisms JF - National Bureau of Economic Research Working Paper Series VL - No. 12224 PY - 2006 Y2 - May 2006 UR - http://www.nber.org/papers/w12224 L1 - http://www.nber.org/papers/w12224.pdf N1 - Author contact info: Daron Acemoglu Department of Economics MIT, E52-380B 50 Memorial Drive Cambridge, MA 02142-1347 Tel: 617/253-1927 Fax: 617/253-1330 E-Mail: daron@mit.edu Mikhail Golosov Department of Economics Princeton University 111 Fisher Hall Princeton, NJ 08544 Tel: 609/258-4003 Fax: 609/258-6419 E-Mail: golosov@princeton.edu Aleh Tsyvinski Department of Economics Yale University Box 208268 New Haven, CT 06520-8268 E-Mail: a.tsyvinski@yale.edu M2 - featured in NBER digest on 2006-05-15 AB - We study the optimal Mirrlees taxation problem in a dynamic economy with idiosyncratic (productivity or preference) shocks. In contrast to the standard approach, which implicitly assumes that the mechanism is operated by a benevolent planner with full commitment power, we assume that any centralized mechanism can only be operated by a self-interested ruler/government without commitment power, who can therefore misuse the resources and the information it collects. An important result of our analysis is that there will be truthful revelation along the equilibrium path (for all positive discount factors), which shows that truth-telling mechanisms can be used despite the commitment problems and the different interests of the government. Using this tool, we show that if the government is as patient as the agents, the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear. In contrast, when the government is less patient than the citizens, there are positive aggregate distortions and positive aggregate capital taxes even asymptotically. Under some additional assumptions on preferences, these results generalize to the case when the government is benevolent but unable to commit to future tax policies. We conclude by providing a brief comparison of centralized mechanisms operated by self-interested rulers to anonymous markets. ER -