Redistribution and Government Commitment

Youngsoo Jang
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Youngsoo Jang: Yonsei University

No 2025rwp-269, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: I study a dynamic game of successive governments in an incomplete-markets economy, where governments set labor income taxes and lump-sum taxes/transfers depending on their commitment ability. I find that commitment enables the government to coordinate policies across periods, thereby internalizing the effects of current policy decisions on the evolution of factor prices and wealth distributions shaped by past history. Commitment facilitates substantial long-term taxes and transfers, incurring long-run welfare losses but yielding short-run welfare gains through front-loaded reductions in precautionary savings and favorable factor price adjustments for low-income individuals. Without commitment, the government overlooks this intertemporal trade-off, yielding smaller short-run gains.

Keywords: Taxes and Transfers; Commitment; Time Inconsistency; Incomplete Markets; Transition Dynamics. (search for similar items in EconPapers)
JEL-codes: E61 H21 (search for similar items in EconPapers)
Pages: 64pages
Date: 2025-07
New Economics Papers: this item is included in nep-dge and nep-pbe
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