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Nonseparable preferences and optimal social security systems

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  • Grochulski, Borys
  • Kocherlakota, Narayana

Abstract

In this paper, we consider economies in which agents are privately informed about their skills, which evolve stochastically over time. We require agents' preferences to be weakly separable between the lifetime paths of consumption and labor. However, we allow for intertemporal nonseparabilities in preferences like habit formation. In this environment, we derive a generalized version of the Inverse Euler Equation and use it to show that intertemporal wedges characterizing optimal allocations of consumption can be strictly negative. We also show that preference nonseparabilities imply that optimal differentiable asset income taxes are necessarily retrospective in nature. We show that under weak conditions, it is possible to implement a socially optimal allocation using a social security system in which taxes on wealth are linear, and taxes/transfers are history-dependent only at retirement. The average asset income tax in this system is zero.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 6 (November)
Pages: 2055-2077

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:6:p:2055-2077

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: Private skill shocks Nonseparable preferences Retrospecitive taxation Social security systems;

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References

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  1. Mark Huggett & Juan Carols Parra, 2006. "How Well Does the US Social Insurance System Provide Social Insurance?," Working Papers, Georgetown University, Department of Economics gueconwpa~06-06-11, Georgetown University, Department of Economics.
  2. Albanesi, Stefania & Sleet, Christopher, 2003. "Dynamic Optimal Taxation with Private Information," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4006, C.E.P.R. Discussion Papers.
  3. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(2), pages 257-279, April.
  4. Narayana R. Kocherlakota, 2003. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Levine's Bibliography 666156000000000426, UCLA Department of Economics.
  5. Daron Acemoglu & Kenneth Rogoff & Michael Woodford, 2009. "NBER Macroeconomics Annual 2008, Volume 23," NBER Books, National Bureau of Economic Research, Inc, number acem08-1, October.
  6. Mikhail Golosov & Narayana Kocherlakota & Aleh Tsyvinski, 2001. "Optimal indirect and capital taxation," Staff Report, Federal Reserve Bank of Minneapolis 293, Federal Reserve Bank of Minneapolis.
  7. P. A. Diamond & J. A. Mirrlees, 1977. "A Model of Social Insurance With Variable Retirement," Working papers 210, Massachusetts Institute of Technology (MIT), Department of Economics.
  8. Borys Grochulski & Tomasz Piskorski, 2007. "Risky human capital and deferred capital income taxation," Working Paper, Federal Reserve Bank of Richmond 06-13, Federal Reserve Bank of Richmond.
  9. Mikhail Golosov & Aleh Tsyvinski & Ivan Werning, 2007. "New Dynamic Public Finance: A User's Guide," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 317-388 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Borys Grochulski, 2008. "Limits to redistribution and intertemporal wedges : implications of Pareto optimality with private information," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Spr, pages 173-196.
  2. Aspen Gorry & Ezra Oberfield, 2012. "Optimal Taxation Over the Life Cycle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 551-572, October.
  3. Philippe Choné & Guy Laroque, 2014. "Income tax and retirement schemes," Sciences Po Economics Discussion Papers 2014-06, Sciences Po Departement of Economics.
  4. Marco Bassetto, 2009. "The Research Agenda: Marco Bassetto on the Quantitative Evaluation of Fiscal Policy Rules," EconomicDynamics Newsletter, Review of Economic Dynamics, Review of Economic Dynamics, vol. 10(2), April.
  5. Luigi Balletta & Giovanni Immordino, 2013. "On Repeated Moral Hazard with a Present Biased Agent," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 341, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  6. Oliver Denk & Jean-Baptiste Michau, 2013. "Optimal Social Security with Imperfect Tagging," Working Papers hal-00796521, HAL.
  7. Koehne, Sebastian & Kuhn, Moritz, 2013. "Optimal capital taxation for time-nonseparable preferences," MPRA Paper 45203, University Library of Munich, Germany.
  8. Sebastian Koehne & Moritz Kuhn, 2014. "Optimal Taxation in a Habit Formation Economy," CESifo Working Paper Series 4581, CESifo Group Munich.
  9. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2011. "Optimal Dynamic Taxes," NBER Working Papers 17642, National Bureau of Economic Research, Inc.
  10. Jean-Baptiste Michau, 2011. "Optimal Redistribution with Intensive and Extensive Labor Supply Margins: A Life-Cycle Perspective," Working Papers hal-00639121, HAL.
  11. Borys Grochulski, 2010. "On the optimality of Ramsey taxes in Mirless economies," Working Paper, Federal Reserve Bank of Richmond 10-14, Federal Reserve Bank of Richmond.

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