Welfare Effects of Controlling Labor Supply? An Application of the Stochastic Ramsey Model

Henrik Amilon () and Hans-Peter Bermin ()
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Henrik Amilon: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Hans-Peter Bermin: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

No 2001:9, Working Papers from Lund University, Department of Economics

Abstract: In this paper we extend Merton's (1975) classic stochastic version of the Ramsey model by allowing the government to control the expected growth rate of the labor supply. We characterize the solution to this control problem for general time-separable preferences, and derive an analytical solution for the CRRA case. The results show to what extent the planner, or government, increases consumption and welfare by taking an active role in controlling the economy. We also explore the implications of government control of labor growth for the term structure of interest rates and the effects of taxes on capital.

Keywords: Utility maximization; Ramsey model; stochastic control; interest rate dynamics; Malliavin calculus (search for similar items in EconPapers)
JEL-codes: C68 D81 E21 E24 E43 E61 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2001-07-10, Revised 2002-03-11
New Economics Papers: this item is included in nep-ltv
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Published in Journal of Economic Dynamics and Control , 2003, pages 331-348.

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:lunewp:2001_009

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