Uninsured idiosyncratic risk and the government asset Laffer curve

Tomoyuki Nakajima and Shuhei Takahashi

Journal of Macroeconomics, 2022, vol. 71, issue C

Abstract: We show that uninsured idiosyncratic earnings risk dramatically influences the long-run government asset Laffer curve, that is, the long-run relationship between government assets and the income from them, under zero taxes. In a heterogeneous agent model with uninsured idiosyncratic risk and a borrowing constraint, increasing government assets eventually decreases government asset income to negative values. In contrast, in a standard representative agent model, government asset income increases linearly with government assets. Under the baseline calibration, uninsured idiosyncratic risk reduces the maximum government asset income–output ratio to less than a quarter.

Keywords: Government assets; Laffer curve; Idiosyncratic risk; Zero taxes; Incomplete markets; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: E62 H63 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:71:y:2022:i:c:s0164070421000896

DOI: 10.1016/j.jmacro.2021.103391

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