Tax and Transfer Programs in an Incomplete Markets Model

Alonso Ortiz, Jorge and Rogerson, Richard (2009): Tax and Transfer Programs in an Incomplete Markets Model.

Abstract

We assess the consequences of increases in the scale of tax and transfer programs in the context of a model with idiosyncratic productivity shocks and incomplete markets. We contrast the outcomes for both hours worked and welfare relative to the results obtained in a stand-in household model, featuring no idiosyncratic shocks and complete markets. Our main finding is that the impact on hours remains very large, but the welfare consequences are very different. The analysis also suggests that tax and transfer policies may have large effects on average labor productivity via selection effects on employment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Heterogeneous agents, idiosyncratic labor income risk, employment
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth

References

Aiyagari, R., (1994), “Uninsured Idiosyncratic Risk and Aggregate Saving,” Quarterly Journal of Economics 109, 659-684.

Bencivenga, Valerie R., (1992),"An Econometric Study of Hours and Output Variation with Preference Shocks," International Economic Review, 33(2), 449-71.

Blanchard, O. (2005), “The Economic Future of Europe,” Journal of Economic Perspectives.

Card, D., (1994), “Intertemporal Labor Supply: An Assessment," in Advances in Econometrics, edited by Christopher Sims, Cambridge University Press, 49-80.

Chang, Y., and Kim S., (2006), “From Individual to Aggregate Labor Supply: A Quantitative Analysis Based on a Heterogeneous Agent Macroeconomy,” International Economic Review 47, 1-27. 31