Interactions between government and firms: a differential game approach (Q926357)

Let \(G\) be a differential game involving a government and a set of representative firms. Firms maximize value, while government maximizes utility, based on spending subject to a balanced budget constraint, as in \textit{R. Gradus} [J. Economics 50, No. 3, 237--256 (1989; Zbl 0683.90016)]. \(G\) is trilinear, which as shown by \textit{S. Clemhout} and \textit{H. Y. Wan jun.} [J. Optimization Theory Appl. 14, 419--424 (1974; Zbl 0272.90091)], implies that feedback and Nash equilibrium coincide; further, Nash equilibrium and Stackelberg equilibrium coincide, when government is the first-mover. The novelty of this paper is to introduce a wealth tax above and beyond a profits tax. The main result is to prove the existence of a doubly optimal wealth tax, one that maximizes both utility and firms' value. An explicit formula for the tax rate is provided.