Heterogeneous Beliefs and Optimal Taxation∗

Although time consistency problems play an important role in public policy, game theoretical models in macroeconomics seem to indicate the opposite. Due to the com-plexity of this kind of models, it is commonly assumed that information is complete and perfect. In turn, this assumption becomes the key element that allows agents to coordinate perfectly to punish the government if it does not do what private agents want. As a result, a wide range of feasible payoffs can be sustained as equilibrium, including the best payoff under commitment. Since this approach is widely used for normative purposes a natural question emerges: are the above results robust to small variations in information? This paper analyzes an investment taxation problem in an economy with incomplete information. Specifically, we study an environment with the following main characteristics: 1) the aggregate productivity (fundamental) is stochas-tic, 2) only the government observes it and; 3) every agent privately receives a noisy signal about the fundamental. The first characteristic implies that the best policy (tax on investment) with commitment is state contingent. The second and third character