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A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation

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  • Brecher, Richard A.
  • Chen, Zhiqi
  • Choudhri, Ehsan U.

Abstract

This paper introduces private saving and public debt into the shirking-unemployment model of Shapiro and Stiglitz (1984), while relaxing their exclusive focus on steady states. After generalizing their no-shirking constraint to accommodate asset accumulation, and demonstrating that the resulting economy's equilibrium is saddle-path stable, we use our dynamic model to obtain significant departures from the Shapiro-Stiglitz prescriptions for optimal policy. Most notably, wage income should be taxed (not subsidized) in the long run if the labor market is sufficiently distorted. Furthermore, interest income should be (exhaustively) taxed only during an initial interval of time, as in Chamley's (1986) full-employment model.

Suggested Citation

  • Brecher, Richard A. & Chen, Zhiqi & Choudhri, Ehsan U., 2010. "A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1392-1402, August.
  • Handle: RePEc:eee:dyncon:v:34:y:2010:i:8:p:1392-1402
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    References listed on IDEAS

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    1. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    2. David Domeij, 2005. "Optimal Capital Taxation and Labor Market Search," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 623-650, July.
    3. David M. Arseneau & Sanjay K. Chugh, 2006. "Ramsey Meets Hosios: The Optimal Capital Tax and Labor Market Efficiency," Computing in Economics and Finance 2006 222, Society for Computational Economics.
    4. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
    5. Kimball, Miles S, 1994. "Labor-Market Dynamics When Unemployment is a Worker Discipline Device," American Economic Review, American Economic Association, vol. 84(4), pages 1045-1059, September.
    6. Richard A. Breche & Zhiqi Chen & Ehsan U. Choudhri, 2002. "Unemployment and Growth in the Long Run: An Efficiency-Wage Model with Optimal Savings," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(3), pages 875-894, August.
    7. Michelle Alexopoulos, 2006. "Shirking in a monetary business cycle model," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 689-718, August.
    8. Stefania Albanesi & Roc Armenter, 2012. "Intertemporal Distortions in the Second Best," Review of Economic Studies, Oxford University Press, vol. 79(4), pages 1271-1307.
    9. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    10. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-622, May.
    11. A. B. Atkinson & N. H. Stern, 1974. "Pigou, Taxation and Public Goods," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 119-128.
    12. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-132, March.
    13. Michelle Alexopoulos, 2003. "Growth and unemployment in a shirking efficiency wage model," Canadian Journal of Economics, Canadian Economics Association, vol. 36(3), pages 728-746, August.
    14. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
    15. Christophe Chamley, 1980. "Optimal Intertemporal Taxation and the Public Debt," Cowles Foundation Discussion Papers 554, Cowles Foundation for Research in Economics, Yale University.
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    Cited by:

    1. Till Gross, 2013. "Capital Taxation, Intermediate Goods, and Production Efficiency," Carleton Economic Papers 13-09, Carleton University, Department of Economics.
    2. repec:psc:journl:v:9:y:2017:i:4:p:359-377 is not listed on IDEAS
    3. Robert Jump, 2014. "A Fair Wage Explanation of Labour Market Volatility," Studies in Economics 1413, School of Economics, University of Kent.
    4. Till Gross, 2013. "Capital Tax Competition and Dynamic Optimal Taxation," Carleton Economic Papers 13-08, Carleton University, Department of Economics.

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