Uninsured idiosyncratic risk and the government asset Laffer curve

We show that uninsured idiosyncratic earnings risk dramatically influences the long-run government asset Laffer curve, that is, the long-run relationship between government assets and the income from them, under zero taxes. In a heterogeneous agent model with uninsured idiosyncratic risk and a borrowing constraint, increasing government assets eventually decreases government asset income to negative values. In contrast, in a standard representative agent model, government asset income increases linearly with government assets. Under the baseline calibration, uninsured idiosyncratic risk reduces the maximum government asset income–output ratio to less than a quarter.