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Are unconditional lump-sum transfers a good idea?

Author

Listed:
  • Chen, Yunmin
  • Chien, YiLi
  • Wen, Yi
  • Yang, C.C.

Abstract

The role of unconditional lump-sum transfers in improving social welfare in heterogenous agent models has not been thoroughly understood in the literature. We adopt an analytically tractable Aiyagari-type model to study the distinctive role of unconditional lump-sum transfers in reducing consumption inequality due to ex-post uninsurable income risk under borrowing constraints. Our results show that in the presence of ex-post heterogeneity and in the absence of wealth inequality, unconditional lump-sum transfers are not a desirable tool for reducing consumption inequality—the Ramsey planner opts to rely solely on public debt and a linear labor tax (in the absence of a lump-sum tax) to mitigate income risk without the need for lump-sum transfers, in contrast to the result obtained by Werning (2007), Azzimonti and Yared (2017), and Bhandari et al. (2017) in models with ex-ante heterogeneity.

Suggested Citation

  • Chen, Yunmin & Chien, YiLi & Wen, Yi & Yang, C.C., 2021. "Are unconditional lump-sum transfers a good idea?," Economics Letters, Elsevier, vol. 209(C).
  • Handle: RePEc:eee:ecolet:v:209:y:2021:i:c:s0165176521003657
    DOI: 10.1016/j.econlet.2021.110088
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    1. François Le Grand & Xavier Ragot, 2022. "Managing Inequality Over Business Cycles: Optimal Policies With Heterogeneous Agents And Aggregate Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 511-540, February.
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    More about this item

    Keywords

    Lump-sum transfers; Universal basic income; Ramsey problem; Public liquidity; Incomplete markets; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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