Time Inconsistency of Benevolent Government Economies
نویسنده
چکیده
A dynamic Walrasian economy is said to exhibit inconsistency if the competitive equilibrium path resulting from government reoptimization at some time rr0 is not a continuation of the competitive equilibrium path resulting from the initial government optimization at time 0. The present paper establishes necessary and sufficient conditions for consistency for a general class of dynamic Walrasian economies. It is seen, for example, that reliance on nondistortionary policy instruments is neither necessary nor sufftcient for consistency. It is also shown that Pareto optimal paths can be supported as optimal competitive equilibrium paths only if consistency prevails. However, consistent optimal competitive equilibrium paths need not be Pareto optimal.
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