Taxing capital is a good idea: the role of idiosyncratic risk in an OLG model

Ryoji Hiraguchi () and Akihisa Shibata

No 853, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: We investigate an overlapping generations model (OLG) model in which agents who live for two periods receive idiosyncratic productivity shocks when they are old. We show that a combination of lump-sum and linear capital taxes can always Pareto-improve the allocation, that is, it can raise the equilibrium welfare of one generation without affecting that of the others. As D?vila et al. (Econometrica (2012)) show, a capital reduction in one period raises the welfare levels of agents who are old in that period, but lowers that of the young agents, because it reduces their wages. We show that the government can compensate for these wage losses by additionally taxing the old agents, such that their welfare gains remain positive.

Keywords: idiosyncratic risk; capital tax, incomplete markets, overlapping generations (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Pages: 20pages
Date: 2013-03
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pub
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.kier.kyoto-u.ac.jp/DP/DP853.pdf (application/pdf)

Related works:
Journal Article: Taxing capital is a good idea: The role of idiosyncratic risk in an OLG model (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kyo:wpaper:853

Access Statistics for this paper

More papers in KIER Working Papers from Kyoto University, Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Makoto Watanabe ().