Optimal Taxation in a Dynamic Model of Shirking and Unemployment: Shapiro and Stiglitz Meet Chamley

Richard Brecher, Zhiqi Chen and Ehsan Choudhri ()

No 07-07, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: This paper analyzes optimal taxation in an efficiency-wage economy with involuntary unemployment, thereby extending Chamley’s (1986) optimal-tax analysis of the standard full-employment case. For this purpose, we introduce optimal savings into the shirking-unemployment model of Shapiro and Stiglitz (1984), and go beyond their exclusive focus on steady-state equilibrium. Our most surprising result is that despite the presence of jobless workers the government should impose a positive tax (rather than subsidy) on wage income in the long run, if the labor market is sufficiently distorted.

Pages: 19 pages
Date: 2007-07, Revised 2010-08
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Published: Revised version: A Dynamic Model of Shirking and Unemployment: Private Saving, Public Debt, and Optimal Taxation, Journal of Economic Dynamics and Control, Vol. 34, Issue 8. (August 2010), pp. 1392-1402

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Persistent link: https://EconPapers.repec.org/RePEc:car:carecp:07-07

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