Working Paper: NBER ID: w19470
Authors: Anmol Bhandari; David Evans; Mikhail Golosov; Thomas J. Sargent
Abstract: A planner sets a lump sum transfer and a linear tax on labor income in an economy with incomplete markets, heterogeneous agents, and aggregate shocks. The planner's concerns about redistribution impart a welfare cost to fluctuating transfers. The distribution of net asset holdings across agents affects optimal allocations, transfers, and tax rates, but the level of government debt does not. Two forces shape long-run outcomes: the planner's desire to minimize the welfare costs of fluctuating transfers, which calls for a negative correlation between the distribution of net assets and agents' skills; and the planner's desire to use fluctuations in the real interest rate to adjust for missing state-contingent securities. In a model parameterized to match stylized facts about US booms and recessions, distributional concerns mainly determine optimal policies over business cycle frequencies. These features of optimal policy differ markedly from ones that emerge from representative agent Ramsey models like Aiyagari et al (2002).
Keywords: optimal taxation; aggregate shocks; redistribution; welfare economics
JEL Codes: E62; H21; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government transfers (H59) | individual welfare outcomes (I31) |
| distribution of net asset holdings (D14) | welfare cost of decreasing transfers (D69) |
| government debt distribution (H63) | overall welfare (I31) |
| government’s ability to respond to shocks (H12) | welfare outcomes (I38) |
| economic conditions (E66) | optimal tax and transfer policies (H21) |
| counter-cyclical interest rates (E43) | government policy (F68) |
| government policy (F68) | welfare dynamics (I38) |