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Welfare Effects of Controlling Labor Supply? An Application of the Stochastic Ramsey Model

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Author Info

  • Amilon, Henrik

    ()
    (Department of Economics, Lund University)

  • Bermin, Hans-Peter

    ()
    (Department of Economics, Lund University)

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    Abstract

    In this paper we extend Merton's (1975) classic stochastic version of the Ramsey model by allowing the government to control the expected growth rate of the labor supply. We characterize the solution to this control problem for general time-separable preferences, and derive an analytical solution for the CRRA case. The results show to what extent the planner, or government, increases consumption and welfare by taking an active role in controlling the economy. We also explore the implications of government control of labor growth for the term structure of interest rates and the effects of taxes on capital.

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    Bibliographic Info

    Paper provided by Lund University, Department of Economics in its series Working Papers with number 2001:9.

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    Length: 34 pages
    Date of creation: 10 Jul 2001
    Date of revision: 19 Feb 2002
    Publication status: Published in Journal of Economic Dynamics and Control , 2003, pages 331-348.
    Handle: RePEc:hhs:lunewp:2001_009

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    Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
    Phone: +46 +46 222 0000
    Fax: +46 +46 2224613
    Web page: http://www.nek.lu.se/en
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    Related research

    Keywords: Utility maximization; Ramsey model; stochastic control; interest rate dynamics; Malliavin calculus;

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