This paper studies dynamic non-linear taxation in a two-period model without government commitment and a continuum of agents with privately known skill parameters, which are constant overtime. The government is utilitarian but cannot commit at t=1 to the tax scheme that she will propose at t=2....

I provide empirical evidence that badly governed firms respond more to aggregate shocks than do well governed firms. I build a simple model where managers are prone to over-invest and where shareholders are more willing to tolerate such a behavior in good times. The model successfully explains...