Income Taxation when Markets are Incomplete



126


M. Tirelli

where y = ∑j yj. Since we are considering economies in Ψ *, under the
assumption that
HS - J , Theorem 2 implies that r 8 = 0, and thus r = 0.
System (6) has no solution.

(2.1) r1 = 0, for some h, implies that either rj4 (W) or rj4 = 0 for all j :
Suppose not, so that
rj4 ( W) / {0} for some j, and rhl = 0 for some
h; the latter implies rh2 = rh8 Duh by (I), and r6 = 0 by (II) and consumers’
foc’s; next, postmultiplying
(V)j by rj4, and using strict quasi-convexity of
f j , yields a contradiction, and so rj4 = 0.

(2.2) r1 = 0 implies r = 0:

Now r1 = 0 implies that rj4 (W) or rj4 = 0 for all j, by (2.1).
Also
rh1 = 0 for all h, and the latter, implies rh3 = 0 for all h, by (III)
(and the full rank property of
W). Then, (III) and (I), respectively, imply
ɪ
j Ji θj rjs = 0, r2 s = rhDsuh for all h, s. Using these results, and con-
sumers’ foc’s (
λh ∙ Rj = qj), in (VII) yields (9) in (2.0) above. Therefore,
r = 0.

(2.3) rh1 = 0 for some h and r4 = 0 implies r = 0:

Firstly, rh1 = 0, for some h, implies rh2 = rh8Duh by (I), and r6 = 0,
rh2 W = 0 for all h, by (II). Using rj4 = 0, for all j, in (III) implies that
either
rhl = rh WT or (rh, r^) = 0 for all h. Postmultiplying (I) by rh1 T,
and using the latter result, yields
rh3WTD2uhWrh3T = 0 for all h. By strict
quasi-concavity of
uh , this holds iff rh3 = 0 for all h, and hence r 1 = 0.
Finally, we can apply (2.0).

We can finally gather the results in Cases (a) and (b), respectively in
Parts 1, 2 above, and conclude the proof by applying Sard’s theorem: there
exists a dense set of economies,
Ω** in Ω*, such that, for every ω in Ω**,
G (ω) is a submersion (see, e.g., Guillemin and Pollack (1974), p. 62). □

Appendix

Lemma 3. The natural projection φ : E → Ω is proper

Proof. Let C be a compact and nonempty subset of Ω. We have to show
that, for each converging sequence
r)r=1,2,..., r) → ω *, ωr* C ,the
sequence
φ-1 r') = (ξr, ωr) converges in E (i.e., r, ωr) → (ξ*, ω*)
E)
. First, note that every parameter vector r) C has boundaries. Second,
(by Assumption 2(2)) there are subsequences such that
yr is defined on a
compact set when
ωr C; also, by continuity of f, f (yr) → |f (y*)| < ∞,
i.e., (5) of the equilibrium first-order conditions (2) is satisfied. Further,
since
f is twice continuously differentiable, Df(yr) → |Df(y*)| < ∞



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