Optimal Factor Taxation with Credibility. Forthcoming in: Impact of Scientific Computing on Science and Society. Edited by P. Neittaanmäki and M.-L. Rantalainen. Springer Verlag 2022.

Abstract:  In this document, optimal factor taxation is examined when output is produced from labor and capital and some (or all) households save in capital. Main results are as follows. There is a reputational equilibrium where the government has no incentive to change its announced tax policies. In that equilibrium, the assertion of zero capital taxation holds, independently of the wage earners’ savings behavior and their weight in the social welfare function. A specific elasticity rule is derived for the optimal wage tax. Finally, it is shown how fertility and mortality can be introduced as endogenous variables in the model.

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Optimal Population Policy with Health Care and Lethal Pollution (co-authored with Ulla Lehmijoki); Portuguese Economic Journal (2023) 22:31–47

Abstract.  Optimal population policy is examined in the following setup. Families invest in capital, spend on health care and determine their number of children. Firms produce output from labor, capital and pollutants. Pollution increases, but private and public health care decrease mortality dynamically, with lags. Our main findings are the following. A marginal increase in public health care improves welfare as long as it diminishes the mortality rate more than that in private health care. The government can decentralize the social optimum by a parental tax on newborns and a Pigouvian tax on pollutants. Private health care should not be taxed.


Optimal Taxation with Endogenous Population Growth and the Risk of Environmental Disaster. In: Dynamic Economic Problems with Regime Switches. Series “Dynamic Modeling and Econometrics in Economics and Finance” No. 25. Springer Nature Switzerland AG 2021.

Abstract. This study considers a market economy where firms produce goods from labor and capital and households supply labor, rear children, save in capital, promote their members’ health and longevity by health care and derive utility from their consumption and children, without caring of their adult offspring. There is a risk that population growth and capital accumulation trigger a lethal environmental disaster. Optimal policy is solved by a game where the government is the leader and the representative household the follower. The solution yields precautionary taxes on both capital income and health care.

TUHAT link

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Public Policy, Footloose Capital, and Union Influence. Review of International Economics 2020. Vol. 28 (4), 976-991.

Abstract. This document sets up a unionized general oligopolistic equilibrium model of countries, where capital is footloose and governments maximize utilitarian welfare. When capital owners have weak influence on public policy, there is unemployment and the governments compete for jobs, causing a distortion with suboptimal wages. Then globalization—as characterized by a decrease in impediments to international investment—increases the wage elasticity of capital flight, decreasing wages and increasing employment. This benefits the capital owners and the unemployed workers getting a job, but harms the other workers. International coordination of public policy alleviates these consequences of globalization.


Emission Permit Trading with a Self-Interested Regulator. Environmental Economics and Policy Studies. 21 (2019): 183-196.

Abstract.  I examine the welfare effects of emission permit trading in an economy where the use of energy in production generates welfare-harming emissions, there is a regulator that sets industry-specific emission permits and the industries influence the regulator by paying political contributions. I show that policy with nontraded emission permits establishes aggregate production efficiency. Emission permit trading hampers efficiency and welfare by increasing the use of emitting inputs in dirty and decreasing that in clean industries.

DOI 10.1007/s10018-019-00236-8

Optimal Taxation with Endogenous Fertility and Health-Damaging Emissions. IFAC PapersOnLine 51 (2018), issue 32, 79-83

Abstract.  Output is produced from labor and capital by technologies that differ in their emission intensity and relative capital intensity. Aggregate emissions decrease every individual’s health, but each individual can invest its own health. Population grows by the difference of fertility and exogenous mortality. Labor is used in production or child rearing. I construct a differential game where the benevolent government is a leader that determines taxes and subsidies, while the representative family is a follower that saves in capital and decides on its number of children. The main results are as follows. Without government intervention, population increases or decreases indefinitely. Capital should be taxed, if dirty technology, and subsidized, if clean technology is relatively capital intensive. Child rearing should be taxed, if dirty technology is relatively capital intensive or mildly labor intensive.



(2017) Emission Permit Trading with Global Externality Problems. Tapio Palokangas, HECER, University of Helsinki.

Abstract.  I examine a set of heterogeneous countries where firms produce goods from emitting inputs and fixed resources. Emissions cause global pollution that harms everyone’s welfare. There is a benevolent international regulator that grants country-specific emission permits. It is shown that welfare decreases, if the countries are allowed to trade in emission permits. If the sellers of permits are on the average richer than the buyers, then the regulator grants too much, and if poorer, too little permits from the welfare point of view.


LINK: First IIASA Summer Workshop on Green Growth Modeling

(2017) Optimal Taxation,Endogenous Fertility and Emissions-Induced Mortality. Tapio Palokangas, HECER, University of Helsinki.

Abstract.  I examine optimal taxation in an economy where output is produced from labor and capital by technologies that differ in their emission intensity and relative demand for capital and labor. Families save in capital and determine fertility. Emissions increase, but public services (e.g. sanitation, medical care) decreases mortality. Solving the differential game between the social planner and the families leads to the following result. Only if dirty technology is capital intensive relative to clean technology, a wealth tax is optimal. Only if dirty technology is labor intensive enough relative to clean technology, a child-rearing subsidy is optimal. 

  • Paper presented at the International Workshop “Economic Growth, Macroeconomic Dynamics and Agents’ Heterogeneity” in the European University at St Petersburg, May 25-26, 2017.
  • Paper presented in IIASA, Laxenburg/Vienna, Austria, July 25, 2017.


(2017) Labor Market Regulation, International Trade and Footloose Capital. IZA Discussion Paper No. 10468

Abstract. I examine the effects of globalization in countries where the employed workers support the unemployed and the governments control wages by regulating the workers’ relative bargaining power. I use a general oligopolistic equilibrium model of two integrated countries with two inputs: labor and potentially footloose capital. National competition for jobs by labor market deregulation creates a distortion with suboptimal wages. The mobility of capital aggravates that distortion by increasing the wage elasticity of labor demand, which decreases wages and welfare even further. The delegation of labor market regulation to an international agent eliminates that distortion, increasing wages and aggregate welfare.


The preliminary version of this paper has been presented in the following conferences:

    1. European Trade Study Group (ESTG), Helsinki, September 8-10, 2016
    2. International Conference on Dynamics, Growth and International Trade (DEGIT), Paris, September 7-8, 2017


(2016) Fertility, Mortality and Environmental Policy. IZA Discussion Paper No. 10465 (co-authored with Ulla Lehmijoki)

This article examines pollution and environmental mortality in an economy where fertility is endogenous and output is produced from labor and capital by two sectors, dirty and clean. An emission tax curbs dirty production, which decreases pollution-induced mortality but also shifts resources to the clean sector. If the dirty sector is more capital intensive, then this shift increases labor demand and wages. This, in turn, raises the opportunity cost of rearing a child, thereby decreasing fertility and the population size. Correspondingly, if the clean sector is more capital intensive, then the emission tax decreases the wage and increases fertility. Although the proportion of the dirty sector in production falls, the expansion of population boosts total pollution, aggravating mortality.


Paper presented in the following conferences:

  1. “Systems Analysis: Modelling and Control”, Krasovskiy Institute of Mathematics and Mechanics, Ekaterinburg, Russia, October 2016
  2. The 6th Viennese Vintage Workshop, Vienna University of Technology, Austria, December 2016