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Optimal Taxation In A Dynamic Model Of Shirking And Unemployment: Shapiro And Stiglitz Meet Chamley

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Author Info
Richard A. Brecher () (Department of Economics, Carleton University)
Zhiqi Chen () (Department of Economics, Carleton University)
Ehsan Choudhri () (Department of Economics, Carleton University)

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Abstract

This paper analyzes optimal taxation in an efficiency-wage economy with involuntary unemployment, thereby extending Chamley’s (1986) optimal-tax analysis of the standard full-employment case. For this purpose, we introduce optimal savings into the shirking-unemployment model of Shapiro and Stiglitz (1984), and go beyond their exclusive focus on steady-state equilibrium. Our most surprising result is that despite the presence of jobless workers the government should impose a positive tax (rather than subsidy) on wage income in the long run, if the labor market is sufficiently distorted.

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File URL: http://www.carleton.ca/economics/cep/cep07-07.pdf
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Publisher Info
Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 07-07.

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Length: 19 pages
Date of creation: 01 Jul 2007
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Publication status: Published: Carleton Economic Paper
Handle: RePEc:car:carecp:07-07

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