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The Laffer Curve in an Incomplete-Market Economy

Patrick Fève, Julien Matheron and Jean-Guillaume Sahuc

No 707, IDEI Working Papers from Institut d'Économie Industrielle (IDEI), Toulouse

Abstract: This paper is a quantitative investigation into the characteristics of the Laffer curve in a neoclassical growth model with incomplete markets and heterogeneous, liquidity-constrained agents. We show that the shape of the Laffer curves related to taxes on labor, capital and consumption dramatically changes depending on which of transfers or government debt are adjusted to make the government budget constraint hold. When transfers are adjusted, the Laffer curve has the traditional shape. However, when debt is adjusted, the Laffer curve looks like a horizontal S, in which case fiscal revenues can be associated with up to three diferent levels of taxation. This finding occurs because the tax rates change non monotonically with public debt when markets are incomplete.

Keywords: Laffer Curve; Incomplete Market; Labor Supply; Precautionary Savings; Public Debt (search for similar items in EconPapers)
JEL-codes: E60 (search for similar items in EconPapers)
Date: 2012-04, Revised 2013-07
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: The Laffer Curve in an Incomplete-Market Economy (2013) Downloads
Working Paper: The Laffer Curve in an Incomplete-Market Economy (2013) Downloads
Working Paper: THE LAFFER CURVE IN AN INCOMPLETE-MARKETS ECONOMY (2012) Downloads
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