Macroeconomic stabilization through taxation and indexation: The use of firm-specific information |
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Authors: | Richard C. Marston Stephen J. Turnovsky |
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Affiliation: | 1. University of Pennsylvania, Philadelphia, PA 19104, USA;2. National Bureau of Economic Research, Cambridge, MA 02138, USA;3. University of Illinois, Champaign, IL 61820, USA;4. National Bureau of Economic Research, Cambridge, MA 02138, USA |
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Abstract: | 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 taxation scheme together with a wage 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. |
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