Limits to redistribution and intertemporal wedges : implications of Pareto optimality with private information

Numerous recent studies on macroeconomic policy--including monetary policy and tax policy--have incorporated private information in their models of the economy. In such models, characterization of Pareto-optimal allocations is an important step of analysis. In this article, we study Pareto optima in a simple model economy with heterogeneous agents. We characterize and compare all Pareto-optimal allocations both with and without private information. We also demonstrate the limits to redistribution and intertemporal distortions that arise as implications of Pareto optimality with private information.