Optimal Taxation: Merging Micro and Macro Approaches

This paper argues that the large body of research that follows Mirrlees approach to optimal taxation has been developing in two directions, referred to as the micro and macro literatures. We review the two literatures and argue that both deliver important insights that are often complementary to each other. We argue that merging the micro and macro approaches can prove beneficial to our understanding of the nature of efficient redistribution and social insurance and can deliver implementable policy recommendations.     

A Theory of Liquidity and Regulation of Financial Intermediation

This paper studies a Diamond–Dybvig model of providing insurance against unobservable liquidity shocks in the presence of unobservable trades. We show that competitive equilibria are inefficient. A social planner finds it beneficial to introduce a wedge between the interest rate implicit in optimal allocations and the economy's marginal rate of transformation. This improves risk sharing by reducing the attractiveness of joint deviations where agents simultaneously misrepresent their type and engage in trades on private markets. We propose a simple implementation of the optimum that imposes a constraint on the portfolio share that financial intermediaries invest in short-term assets.