Income taxation when markets are incomplete
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Proof of Theorem 1. Let Ω * be a subset of Ω restricted to Ψ *, and Ω ** be a
subset of Ω* such that, for every ω ∈ Ω**, G(ω) is a submersion. Applying
Lemma 1 and 2 below we conclude that Ω ** is open and dense in Ω. □
Lemma 1. Ω** ⊂ Ω* is open.
Proof. Recall that ξ = (ξ ', t1), and let Dξ Vα denote a generic submatrix
of the Jacobian of V with respect to ξ . Define
Kα = {u ∈ RH : det (DξVα) = 0} = det (DξVα)-1 (0).
This set is closed in RH.26 The set of critical points of the map V, N =
{u ∈ RH : det (DξVα) = 0 ∀α} = ∩αKα, is also closed. Therefore its
complement NR = RH/N is open.
Let the function φ : E → Ω be the natural projection of the equilibrium
manifold onto the parameter space. Define
Bc = {(ξ, u,f,ψ) ∈ E : det (D^) = 0 ∀α} ,
the set of critical values of φ . Bc is relatively closed, being the preimage of
{0} under a continuous function. Then, to ensure that the image of Bc under
the mapping φ is closed, it suffices to establish that φ is proper, which is
proved as Lemma 3 in the appendix. Thus, φ(Bc) is closed in Ω*, and its
complement, Ω** = Ω*\φ(Bc), is relatively open. □
Lemma 2. Ω** is dense.
Proof. We divide the proof into two parts: the first considers a pure exchange
economy, Jι = 0, J2 = 0, while the second deals with a production econ-
omy, J2 = 0.
Part 1 (pure exchange GEI) Jι = 0, J2 = 0.
In the case of a pure exchange, J2 = 0, J = J1, (6) reduces to:
(I) |
∀h, rh1 D2uh +Ah - rh2 + rh8Duh = 0 |
HN |
r1 |
(II) |
∀h, rh2 W + r6 = 0 |
HJ |
r3 |
(III) |
∀h, -rh1 +rh3WT =0 |
HN |
r2 |
(VI) |
∀j, Thhrh0θh - Thhλhhrj = 0 |
J |
r6 (7) |
(VII) |
∀s ∈ S, Thh,j(θjrh,s + rljλh)Rj = 0 |
S |
( r 8) |
(VIII) |
∀s ∈ S, Thrh,s + Hrs = 0 |
S |
r7 |
(IX) |
Ilr Il - 1 = 0 |
1. |
26 This is because it is the preimage of a singleton by a continuous function, in a complete
metric space. Here, the continuous function is the polynomial associated to the determinant
of the continuous linear mappings DzVα ' s.