Public Economics Lectures Part 1: Introduction

Optimization Frictions
Restriction on φ: Utility loss from deviations is less than exogenous
threshold δ:
U(xi ∗ ) − U(xi
∗ + φ i
) < δpxi
∗
Frictions make agents deviate from optimal behavior as long as utility
costs are not too large
This restriction generates a class of models around nominal model
Includes adjustment cost models, inattention, etc.
A δ class of models maps price to a choice set X (p, δ) instead of a
single point x ∗ (p)
Public Economics Lectures ()Part 5: Income Taxation and Labor Supply 188 / 217