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Optimal Taxation in a Stochastic Endogenous Growth Model with Congestion

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  • Ott, Ingrid
  • Soretz, Susanne

Abstract

In this paper the impacts of income and consumption taxes are analyzed within a model of stochastic endogenous growth with congestion. It is shown that the optimal amount of governmental input diminishes with uncertainty and that the optimal financing depends on the relation between the degrees of rivalry and relative risk aversion. Due to the insurance effect associated with the taxation of stochastic income flows, the growth effect of taxation is ambiguous. There is a continuum of optimal tax policies which depends on the assumptions about the governmental budget constraint. The results for a balanced budget are contrasted with the outcomes in the setting with government debt. We demonstrate that in both cases the optimal structure of financing government expenditure not only depends on the degree of rivalry, as in the corresponding deterministic congestion models, but also on the degree of risk aversion.

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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover with number dp-253.

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Length: 24 pages
Date of creation: Apr 2002
Date of revision:
Handle: RePEc:han:dpaper:dp-253

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Keywords: Endogenous Growth; Congestion; Uncertainty; Taxation;

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References

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  1. Robert J. Barro & Xavier Sala-i-Martin, 1990. "Public Finance in Models of Economic Growth," NBER Working Papers 3362, National Bureau of Economic Research, Inc.
  2. Clemens, Christiane & Soretz, Susanne, 1997. "Welfare Effects of Income Taxation in a Model of Stochastic Growth," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-210, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  3. Fisher, Walter H & Turnovsky, Stephen J, 1998. "Public Investment, Congestion, and Private Capital Accumulation," Economic Journal, Royal Economic Society, vol. 108(447), pages 399-413, March.
  4. Edwards, John H. Y., 1990. "Congestion function specification and the "publicness" of local public goods," Journal of Urban Economics, Elsevier, vol. 27(1), pages 80-96, January.
  5. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
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  7. Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 21(10), pages 1627-1644, August.
  8. Clemens, Christiane & Soretz, Susanne, 1999. "Konsequenzen des Zins- und Einkommensrisikos auf das wirtschaftliche Wachstum," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-221, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  9. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
  10. Stephen Turnovsky, 1998. "On the Role of Government in a Stochastically Growing Open Economy," Working Papers 0073, University of Washington, Department of Economics.
  11. Turnovsky, Stephen J, 1993. "Macroeconomic Policies, Growth, and Welfare in a Stochastic Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 953-81, November.
  12. Joseph E. Stiglitz, 1968. "The Effects of Income, Wealth, and Capital Gains Taxation on Risk Taking," Cowles Foundation Discussion Papers 248, Cowles Foundation for Research in Economics, Yale University.
  13. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  14. Eaton, Jonathan, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," Review of Economic Studies, Wiley Blackwell, vol. 48(3), pages 435-45, July.
  15. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  16. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
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Cited by:
  1. Ingrid Ott & Susanne Soretz, 2004. "Growth and Welfare Effects of Tax Cuts: The Case of a Productive Public Input with Technological Risk," Empirica, Springer, vol. 31(2), pages 117-135, June.

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