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Consumption Taxes and Divisibility of Labor under Incomplete Markets

Shuhei Takahashi and Tomoyuki Nakajima ()

No 797, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze lump-sum transfers financed through consumption taxes in a heterogeneous-agent model with uninsured idiosyncratic wage risk and endogenous labor supply. The model is calibrated to the U.S. economy. We find that consumption inequality and uncertainty decrease with transfers much more substantially under divisible than indivisible labor. Increasing transfers by raising the consumption tax rate from 5% to 35% decreases the consumption Gini by 0.04 under divisible labor, whereas it has almost no effect on the consumption Gini under indivisible labor. The divisibility of labor also affects the relationship among consumption-tax financed transfers, aggregate saving, and the wealth distribution.

Date: 2016
New Economics Papers: this item is included in nep-dge, nep-pbe, nep-pub and nep-sog
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:797

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