An employment game between government and firms

Dynamic taxation of profits is a differential game between government and firms. The state equation is the accumulation of capital stock due to the investment of firms. The objective of the firms is the total stream of dividends. The objective of the government is total employment. With high tax revenues the government can stimulate public employment, but economic growth slows down, which is bad for private employment. The time-inconsistent open-loop Stackelberg solution for this differential game is compared with the time-consistent feedback Stackleberg solution. The efficiency of the solutions and the sensitivity with respect to capital/labor intensiveness are investigated.