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Agenda Control Consider a state whose legislature is going to reset the tax rate for capital gains. Suppose that a committee rst proposes (a new
Agenda Control Consider a state whose legislature is going to reset the tax rate for capital gains. Suppose that a committee rst proposes (a new piece of legistration that sets) a new tax rate, r1 E [0, 1]. The Legislature can then either pass or reject the proposal. If the proposal is rejected, the the current tax rate, To, stays unchanged. Model the committee and the legislature as two players who have ideal tax rates 0.2 and 0.3, respectively, whose payoffs are given by | 'r'\" 0.2 | and | 'r\" 0.3 |, where 'r'\" is the nal prevailing tax rate. Model this situation as an extensive game and answer the following questions. (a) Suppose that the current tax rate is 15%, i.e., r0 = 0.15, nd the subgame equilibria of this game. (b) How does your answer change if the current tax rate is 35%? (c) Characterize the final prevailing tax rate in (subgame perfect) equilibria as a function of r0 E [0, 1]
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