The Econometric SocietyEdited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262
Econometrica: Nov, 1984, Volume 52, Issue 6
https://doi.org/0012-9682(198411)52:6<1437:DIREAO>2.0.CO;2-0
p. 1437-1452
Brian Hillier, James M. Malcomson
The consensus in the literature is that the use of only lump-sum taxation is a necessary and sufficient condition for the dynamic consistency of optimal open-loop government policies. We show that this does not hold for models with nonhomogeneous agents. Then the stated condition is neither necessary nor sufficient. Dynamic inconsistency arises because of a shortage of appropriate government policy instruments which amounts to the consensus condition only in special cases.
