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Redistribution Policy in a Model with Heterogeneous Time Preference

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We examine how redistribution policy affects the distribution of income when human capital accumulation is endogenous and the fundamental source of heterogeneity in the economy stems from varying degrees of time preference across members of the population. In comparing the steady states of a dynamic general equilibrium model calibrated to the Canadian economy, we find that progressively more generous income transfer programs (financed with a flat income tax) lead to only modest decreases in income inequality, but significant increases in earnings inequality and large losses in per capita output. With the exception of the bottom income quintile, individuals display a strong preference for the long-run situation associated with the absence of government redistribution policy. Nevertheless, taking into account transition dynamics, a majority of individuals would vote for implementation of redistribution policy. The distribution of time-preference plays a critical role in generating this last result. Nous examinons comment les politiques redistributrices influencent la distribution du revenu lorsque l'accumulation de capital humain est endogène et que la source fondamentale de l'hétérogénéité dans l'économie provient des différents degrés de préférence pour le présent dans la population. En comparant les états stationnaires d'un modèle d'équilibre général dynamique étalonné pour le Canada, nous trouvons que des programmes de transferts de revenu plus généreux (financés par une imposition uniforme des revenus) ne mènent qu'à de faibles baisses de l'inégalité des revenus, mais augmentent significativement l'inégalité des salaires et mènent à de grandes pertes au niveau du capital par tête. À l'exception du quintile le plus faible, les individus ont une forte prédilection pour la situation de long terme associée à une absence de politique de redistribution. Malgré tout, une majorité vote pour une politique redistributrice en tenant compte des dynamiques de transition. La distribution de la préférence pour le présent joue un rôle crucial pour obtenir ces derniers résultats.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 66.

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Length: 41 pages
Date of creation: May 1998
Date of revision:
Handle: RePEc:cre:crefwp:66

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Keywords: Heterogeneous time preference; redistribution; dynamic general equilibrium;

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  1. Andolfatto, David & Gomme, Paul, 1996. "Unemployment insurance and labor-market activity in Canada," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 44(1), pages 47-82, June.
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  3. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
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  8. Masao Ogaki & Andrew Atkeson, 1997. "Rate Of Time Preference, Intertemporal Elasticity Of Substitution, And Level Of Wealth," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 564-572, November.
  9. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, vol. 30(3), pages 1333-81, September.
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  12. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Growth with Many Consumers," Discussion Papers 518, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Burbidge, John B & Magee, Lonnie & Robb, A Leslie, 1997. "Canadian Wage Inequality over the Last Two Decades," Empirical Economics, Springer, vol. 22(2), pages 181-203.
  14. Nancy A. Jianakoplos & Paul L. Menchik, 1997. "Wealth Mobility," The Review of Economics and Statistics, MIT Press, vol. 79(1), pages 18-31, February.
  15. Lawrance, Emily C, 1987. "Transfers to the Poor and Long Run Savings," Economic Inquiry, Western Economic Association International, vol. 25(3), pages 459-78, July.
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