Tax Policy Under Keeping Up with the Joneses and Imperfect Competition
AbstractThis paper examines the optimal (first-best) fiscal policy in a stochastic, infinite-horizon representative agent model that exhibits a ¡°keeping up with the Joneses¡± utility function and imperfectly competitive product markets. We find that the optimal labor tax is a constant, whose sign is determined by the relative strength of consumption externality and monopoly power. Moreover, the optimal capital tax is unambiguously negative and affects the economy countercyclically. Our analysis shows that models with capital accumulation, imperfect competition, and ¡°keeping up with the Joneses¡± preferences call for traditional Keynesian demand-management policies that are designed to mitigate business cycle fluctuations.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 6 (2005)
Issue (Month): 1 (May)
Fiscal Policy; Keeping Up with the Joneses; Imperfect Competition;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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