We study dynamic optimal taxation in a class of economies with private information over idiosyncratic skill shocks. We consider economies in which the skill distribution is first order Markov. We show that there exists a tax system that implements the constrained optimal allocation as...

Social insurance arrangements that are optimal from the perspective of a utilitarian planner confronting a population of privately informed agents frequently exhibit an "immiseration" property - with probability 1 an agent's continuation utility will drift downwards to its minimal level. Thus,...

The complete insurance hypothesis is soundly rejected by the data (e.g. Attanasio and Davis, 1996). On the other hand, the permanent income model assumes that the only mechanism available to the agents to smooth consumption is personal savings (self insurance). Those are clearly two extreme...

In this paper we provide sufficient conditions for the validity of the first-order condition approach (FOCA) for two period dynamic moral hazard problems where the agent can save and borrow secretly, and we characterize the optimal contract. Recently, dynamic principal-agent models became very...