Infrastructure and Inequality: Insights from Incorporating Key Economic Facts about Household Heterogeneity

David Klenert, Linus Mattauch, Ottmar Edenhofer and Kai Lessmann

No 4972, CESifo Working Paper Series from CESifo

Abstract: We study the trade-off between equity and growth in the context of tax-financed investment in public capital. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. In contrast to the results of studies that introduce heterogeneity through different initial endowments only, we find that under our heterogeneity assumptions an equity-efficiency trade-off does not necessarily occur. We show that a consumption tax or a capital tax, levied to finance public capital, does not increase inequality. In our model capital tax-financed public investment has even an inequality-reducing effect - thus allowing for Pareto-improving public investment that decreases inequality. Additionally we find that agents differ in their preferred tax rates. These results are valid for both, the case of endogenous growth and the case of steady state convergence and do not require the assumption of an identical rate of pure time preference across all households.

JEL-codes: E21 E60 H23 H31 H54 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: INFRASTRUCTURE AND INEQUALITY: INSIGHTS FROM INCORPORATING KEY ECONOMIC FACTS ABOUT HOUSEHOLD HETEROGENEITY (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4972

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