Are Unconditional Lump-sum Transfers a Good Idea?

Yunmin Chen, YiLi Chien, Yi Wen and C. C. Yang ()
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C. C. Yang: http://www.econ.sinica.edu.tw/english/content/researcher/contents/2013093010101108435/?MSID=2013092820200812032

No 2021-002, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The role of unconditional lump-sum transfers in improving social welfare in heterogenous agent models has not been thoroughly understood in the literature. We adopt an analytically tractable Aiyagari-type model to study the distinctive role of unconditional lump-sum transfers in reducing consumption inequality due to ex-post uninsurable income risk under borrowing constraints. Our results show that in the presence of ex-post heterogeneity and in the absence of wealth inequality, unconditional lump-sum transfers are not a desirable tool for reducing consumption inequality—the Ramsey planner opts to rely solely on public debt and a linear labor tax (in the absence of a lump-sum tax) to mitigate income risk without the need for lump-sum transfers, in contrast to the result obtained by Werning (2007), Azzimonti and Yared (2017), and Bhandari, Evans, Golosov, and Sargent (2017) in models with ex-ante heterogeneity.

Keywords: Lump-sum Transfers; Universal Basic Income; Ramsey Problem; Public Liquidity; Incomplete Markets; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: C61 E22 E62 H21 H30 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2021-02-09, Revised 2021-09-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Note: Publisher DOI: https://doi.org/10.1016/j.econlet.2021.110088
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Published in Economics Letters

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Journal Article: Are unconditional lump-sum transfers a good idea? (2021)
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DOI: 10.20955/wp.2021.002

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