On the Optimality of the Friedman Rule with Heterogeneous Agents and Nonlinear Income Taxation
Fundação Getulio Vargas; Massachusetts Institute of Technology and National Bureau of Economic Research
Money-in-the-utility-function model with heterogeneous agents differing in labor productivity, subject to nonlinear income taxation under private information about productivity. Nests shopping-time and cash-credit models as special cases.
Section III, Proposition 1
Friedman rule is Pareto efficient when combined with nondecreasing labor income tax; zero nominal interest rate implies deflation at rate of time preference, but paper focuses on R=0 as optimal
Main theoretical result of the paper: Proposition 1 establishes Friedman rule (R=0) is Pareto efficient with positive income taxation