Dynamic Problems in Oligopoly Theory and Tax Theory

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This project examines a variety of dynamic problems in public finance, macroeconomics and industrial organization. In tax theory the project determines the characteristics of optimal taxation of capital and labor income, using nonlinear numerical techniques, and incorporating reasonable restrictions on government behavior. It also computes the political outcomes if governments cannot precommit to optimal policies. In industrial organization the project examines a dynamic model of oligopoly which allows firms to choose both quantities and prices, essentially merging the Bertrand and Cournot models. The dynamic model is used to examine the strategic importance of investment, learning, signalling and the incentives for merger. The project also develops numerical techniques which are necessary to examines these dynamic problems with general specifications of demand and supply. The research on tax policy is especially timely and important. The investigator's past work demonstrated that there are substantial differences between the results obtained from standard tax analysis and results from truly dynamic and stochastic models. This project establishes the robustness of the theoretical results by developing more realistic models. The loss due to nonoptimal rules is determined by comparing the optimal policy with alternatives.