We examine how redistribution policy affects the distribution of labour 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 likely vote in favour of implementating a Canadian style redistribution policy. The distribution of time-preference plays a critical role in generating this last result.
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Paper provided by University of Waterloo, Department of Economics in its series Working Papers with number
98006.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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.
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