Redistribution Policy in a Model with Heterogeneous Time Preference

David Andolfatto () and James Redekop
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James Redekop: Department of Economics, University of Waterloo

No 98006, Working Papers from University of Waterloo, Department of Economics

Abstract: We examine how redistribution policy affects the distribution of labour income when human capital accumulation is endogenous and the fundamental source of heterogeneity in the economy stems from varying degrees of time-preference across members of the population. In comparing the steady states of a dynamic general equilibrium model calibrated to the Canadian economy, we find that progressively more generous income transfer programs (financed with a flat income tax) lead to only modest decreases in income inequality, but significant increases in earnings inequality and large losses in per capita output. With the exception of the bottom income quintile, individuals display a strong preference for the long-run situation associated with the absence of government redistribution policy. Nevertheless, taking into account transition dynamics, a majority of individuals would likely vote in favour of implementating a Canadian style redistribution policy. The distribution of time-preference plays a critical role in generating this last result.

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Working Paper: Redistribution Policy in a Model with Heterogeneous Time Preference (1998)
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