Macroeconomic Stabilization Through Taxation and Indexation: The use ofFirm-Specific Information

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This paper considers two alternative approaches to stabilizing an economy with firm-specific productivity disturbances. The first uses wage contracts tying wages in each firm to these disturbances as well as the price level. The second uses a tax on firms which modifies their supply behavior together with a simple waqe indexation rule tying wages to prices alone. Both these schemes are viable as long as the firm-specific disturbance is known to all agents. If the firm alone observes the productivity disturbance, under either scheme it has an incentive to misrepresent current conditions. However, a combination of these two schemes is both welfare maximizing and incentive compatible.

Published: Marston, Richard C. and Stephen J. Turnovsky. "Macroeconomic Stabilization Through Taxation and Indexation: The Use of Firm-Specific Information," Journal of Monetary Economics, Vol. 16, No. 3, Nov. 1985, pp. 375-395.

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