European Business Schools Librarian's Group
HEC Research Papers Series,
HEC Paris
No 1490: Money and Taxes Implement Dynamic Optimal Mechanisms
Bruno Biais, Hans Gersbach, Jean Charles Rochet, Ernst-Ludwig von Thadden and Stéphane Villeneuve
Additional contact information
Bruno Biais: HEC Paris
Hans Gersbach: ETH Zurich - CER-ETH -Center of Economic Research; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)
Jean Charles Rochet: University of Geneva
Ernst-Ludwig von Thadden: Universitaet Mannheim; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
Stéphane Villeneuve: University of Toulouse 1
Abstract: We analyze dynamic capital allocation and risk sharing between a principal and many agents, who privately observe their output. Incentive compatibility requires that agents bear part of their idiosyncratic risk. The larger the agents' risk exposure, the larger the rents the principal can extract from them. The optimal mechanism can be implemented as the equilibrium of a market where agents exchange goods for money, needed to pay taxes. Inflation affects agents' portfolio choice between risky capital and safe money. To implement the optimal mechanism, the principal targets an inflation rate such that agents' risk exposure is the same in equilibrium and in the mechanism.
Keywords: Money; Taxes; Mechanism Design; Incentive Compatibility; Inflation
31 pages, September 22, 2023
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