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On the Time Consistency of Universal Basic Income

Jang, Youngsoo (2023): On the Time Consistency of Universal Basic Income.

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I study how government commitment shapes optimal Universal Basic Income (UBI) by characterizing the equilibria of a dynamic game between heterogeneous individuals and a benevolent government under incomplete markets. I find that given a commitment constraint, the government makes policy decisions by balancing two types of economic forces that reshape individuals' disposable income: income redistribution through taxes and UBI and pecuniary externalities from changes in factor income composition. Commitment technologies determine their balancing across the time dimension. In a calibrated economy, commitment substantially improves welfare by implementing considerable long-run UBI that incurs welfare losses in the long run but generates front-loaded welfare gains. These short-run gains arise from upfront changes in the factor prices favorable for low-income individuals and income redistribution facilitated by reduced precautionary savings early in the transition. Without commitment, the time-consistent UBI brings much smaller welfare gains, overlooking the effects of long-run UBI on the short-run economy.

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