2021-02: Existence of Equilibria in Infinite Horizon Finance Economies with Stochastic Taxation

Abstract: 

This paper proves the existence of equilibria in the Infinite Horizon General Equilibrium with Incomplete Markets (GEI) model with insecure property rights. Insecure property rights come in the form of the stochastic taxes imposed on agents' endowments and assets' dividends. This paper finds that under reasonable assumptions, Financial Markets (FM) equilibria with Transversality Condition (TC) as well as equilibria with Implicit Debt Constraint (IDC) and Explicit Debt Constraint (EDC) exist in Infinite Horizon FM economies with stochastic taxes and with short-lived securities in zero net supply. Also, this paper finds that under reasonable assumptions, FM equilibria with TC as well as equilibria with IDC and EDC exist in Infinite Horizon FM economies with long-lived securities in zero net supply for a dense subset of the set of all stochastic dividend tax rates. Similarly, this paper finds that under reasonable assumptions, FM equilibria with TC as well as equilibria with IDC and EDC exist in Infinite Horizon FM economies with some long-lived securities in positive supply for a dense subset of the set of all stochastic endowment and dividend tax rates. Finally, we find that GEI implies that there is no such thing as the "optimal" buying or selling P/E ratio but instead that it is completely determined by constantly changing investors' expectations of company's after-tax profitability.

Publication date: 
April 5, 2021
Publication type: 
2021 Working Papers
Citation: 
Revised from the Center for Risk Management Research Working Paper 2021-01