Sanjay K. Chugh
Ohio State University
Institutional Affiliations: Ohio State University and Kiel Institute in Germany
Information about this author at RePEc
NBER Working Papers and Publications
|August 2011||Optimal Fiscal Policy with Endogenous Product Variety|
with : w17319
We study Ramsey-optimal fiscal policy in an economy in which product varieties are the result of forward-looking investment decisions by firms. There are two main results. First, depending on the particular form of variety aggregation in preferences, firms' dividend payments may be either subsidized or taxed in the long run. This policy balances monopoly incentives for product creation with consumers' welfare benefit of product variety. In the most empirically relevant form of variety aggregation, socially efficient outcomes entail a substantial tax on dividend income, removing the incentive for over-accumulation of capital, which takes the form of variety. Second, optimal policy induces dramatically smaller, but efficient, fluctuations of both capital and labor markets than in a calibrate...