Consumption Taxes and Divisibility of Labor under Incomplete Markets

Tomoyuki Nakajima and Shuhei Takahashi

No 65, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

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 indi- visible 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.

Keywords: Transfers; Consumption taxes; Inequality; Uncertainty; Divisibility of labor; Incomplete markets (search for similar items in EconPapers)
JEL-codes: C68 D31 E62 J22 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-03
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac and nep-pub
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Citations: View citations in EconPapers (1)

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Working Paper: Consumption Taxes and Divisibility of Labor under Incomplete Markets (2016)
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