Abstract
We consider a simple dynamic model of environmental taxation that exhibits time inconsistency. There are two categories of firms, Believers, who take the tax announcements made by the Regulator to face value, and Non-Believers, who perfectly anticipate the Regulator's decisions, albeit at a cost. The proportion of Believers and Non-Believers changes over time depending on the relative profits of both groups. We show that the Regulator can use misleading tax announcements to steer the economy to an equilibrium that is Pareto superior to the solutions usually suggested in the literature. Depending upon the initial proportion of Believers, the Regulator may prefer a fast or a low speed of reaction of the firms to differences in Believers/Non-Believers profits.
Keywords
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Abrego, L. and Perroni, C. (1999). Investment Subsidies and Time-Consistent Environmental Policy. Discussion paper, University of Warwick, U.K.
Barro, R. and D. Gordon. (1983). Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics, 12:101–122.
Batabyal, A. (1996a). Consistency and optimality in a dynamic game of pollution control I: Competition. Environmental and Resource Economics, 8:205–220.
Batabyal, A. (1996b). Consistency and optimality in a dynamic game of pollution control II: Monopoly. Environmental and Resource Economics, 8:315–330.
Biglaiser, G., Horowitz, J., and Quiggin, J. (1995). Dynamic pollution regulation. Journal of Regulatory Economics, 8:33–44.
Dawid, H. (1999). On the dynamics of word of mouth learning with and without anticipations. Annals of Operations Research, 89:273–295.
Dawid, H. and Deissenberg, C. (2004). On the efficiency-effects of private (dis-)trust in the government. Forthcoming in Journal of Economic Behavior and Organization.
Deissenberg, C. and Alvarez Gonzalez, F. (2002). Pareto-improving cheating in a monetary policy game. Journal of Economic Dynamics and Control, 26:1457–1479.
Dijkstra, B. (2002). Time Consistency and Investment Incentives in Environmental Policy. Discussion paper 02/12, School of Economics, University of Nottingham, U.K.
Gersbach, H., and Glazer, A. (1999). Markets and regulatory hold-up Problems. Journal of Environmental Economics and Management, 37:151–64.
Grüne, L., and Semmler, W. (2002). Using Dynamic Programming with Adaptive Grid Scheme for Optimal Control Problems in Economics. Working paper, Center for Empirical Macroeconomics, University of Bielefeld, Germany, 2002. Forthcoming in Journal of Economic Dynamics and Control.
Hofbauer, J. and Sigmund, K. (1998). Evolutionary Games and Population Dynamics. Cambridge University Press.
Kydland, F. and Prescott, E. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, 85:473–491.
Marsiliani, L. and Renstrőm, T. (2000). Time inconsistency in environmental policy: Tax earmarking as a commitment solution. Economic Journal, 110:C123–C138.
McCallum, B. (1997). Critical issues concerning central bank independence. Journal of Monetary Economics, 39:99–112.
Petrakis, E. and Xepapadeas, A. (2003). Location decisions of a polluting firm and the time consistency of environmental policy. Resource and Energy Economics, 25:197–214.
Simaan, M. and Cruz, J.B. (1973a). On the Stackelberg strategy in nonzero-sum games. Journal of Optimization Theory and Applications, 11:533–555.
Simaan, M. and Cruz, J.B. (1973b). Additional aspects of the Stackelberg strategy in nonzero-sum games. Journal of Optimization Theory and Applications, 11:613–626.
Vallée, T., Deissenberg, C., and Başar, T. (1999). Optimal open loop cheating in dynamic reversed linear-quadratic Stackelberg games. Annals of Operations Research, 88:247–266.
Vallée, T. (1998). Comparison of Different Stackelberg Solutions in a Deterministic Dynamic Pollution Control Problem. Discussion Paper, LEN-C3E, University of Nantes, France.
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2005 Springer Science+Business Media, Inc.
About this chapter
Cite this chapter
Dawid, H., Deissenberg, C., Ševčik, P. (2005). Cheap Talk, Gullibility, and Welfare in an Environmental Taxation Game. In: Haurie, A., Zaccour, G. (eds) Dynamic Games: Theory and Applications. Springer, Boston, MA. https://doi.org/10.1007/0-387-24602-9_9
Download citation
DOI: https://doi.org/10.1007/0-387-24602-9_9
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-24601-7
Online ISBN: 978-0-387-24602-4
eBook Packages: Business and EconomicsEconomics and Finance (R0)