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Production subsidies and redistribution

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  • Azzimonti, Marina
  • de Francisco, Eva
  • Krusell, Per

Abstract

Who gains from stimulating output? We explore a dynamic model with production subsidies where the population is heterogeneous in one dimension: wealth. There are two channels through which production subsidies redistribute resources across the population. First, poorer agents gain from a rise in wages, since--to the extent there is an operative wealth effect in labor supply--they work harder. Second, because a current output boost will raise consumption today relative to the future, thus lowering real interest rates, poor agents gain in relative terms since their income is based less on interest income. We examine optimal redistribution from the perspective of an arbitrary consumer in the population. We show that, if this consumer has commitment at time zero to set all present and future subsidy rates, and for a class of preferences that admits aggregation in wealth, then output stimulation, and hence redistribution, will only occur at time zero; after that, subsidies are zero. A byproduct of our analysis of this environment is a median-voter theorem: with direct voting over subsidy sequences at time zero, the sequence preferred by the median-wealth consumer is the unique outcome. We also study lack of commitment, since interest-rate manipulation is associated with time inconsistency. We analyze this case formally by looking at the Markov-perfect (time-consistent) equilibrium in a game between successive identical decision makers (e.g., the median agent). Here, subsidies persist--they are constant over time--and are more distortionary than under commitment. Moreover, whereas under commitment asset inequality changes initially--in favor of the consumer who decides on policy--it does not under lack of commitment.

Suggested Citation

  • Azzimonti, Marina & de Francisco, Eva & Krusell, Per, 2008. "Production subsidies and redistribution," Journal of Economic Theory, Elsevier, vol. 142(1), pages 73-99, September.
  • Handle: RePEc:eee:jetheo:v:142:y:2008:i:1:p:73-99
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    References listed on IDEAS

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    1. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
    2. Marina Azzimonti & Eva de Francisco & Per Krusell, 2006. "Median-voter Equilibria in the Neoclassical Growth Model under Aggregation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 587-606, December.
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    Cited by:

    1. Azzimonti, Marina & de Francisco, Eva & Quadrini, Vincenzo, 2012. "Financial Globalization, Inequality, and the Raising of Public Debt," CEPR Discussion Papers 8893, C.E.P.R. Discussion Papers.
    2. Konstantinos Angelopoulos & Jim Malley & Apostolis Philippopoulos, 2011. "Time-consistent Fiscal Policy under Heterogeneity: Conflicting or Common Interests?," CESifo Working Paper Series 3444, CESifo Group Munich.
    3. Azzimonti, Marina & Battaglini, Marco & Coate, Stephen, 2016. "The costs and benefits of balanced budget rules: Lessons from a political economy model of fiscal policy," Journal of Public Economics, Elsevier, pages 45-61.
    4. repec:eee:moneco:v:91:y:2017:i:c:p:39-51 is not listed on IDEAS
    5. Christian Roessler & Sandro Shelegia & Bruno Strulovici, 2015. "Collective Commitment," Vienna Economics Papers 1507, University of Vienna, Department of Economics.
    6. Marina Azzimonti, 2011. "Barriers to Investment in Polarized Societies," American Economic Review, American Economic Association, vol. 101(5), pages 2182-2204, August.
    7. Kirill Borissov & Alexander Surkov, 2010. "Endogenous Growth in a Model with Heterogeneous Agents and Voting on Public Goods," EUSP Department of Economics Working Paper Series Ec-01/10, European University at St. Petersburg, Department of Economics, revised 29 Sep 2010.
    8. Lorenzo Burlon, 2017. "Public expenditure distribution, voting, and growth," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(4), pages 789-810, August.
    9. Vincenzo Quadrini & Eva de Francisco & Marina Azzimonti, 2011. "Financial globalization and the raising of public debt," 2011 Meeting Papers 575, Society for Economic Dynamics.
    10. Marco Battaglini, 2009. "On the Case for a Balanced Budget Amendment to the U.S. Constitution," 2009 Meeting Papers 131, Society for Economic Dynamics.
    11. Carroll, Daniel R. & Dolmas, James & Young, Eric R., 2015. "Majority Voting: A Quantitative Investigation," Working Paper 1442, Federal Reserve Bank of Cleveland.
    12. Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.
    13. Anmol Bhandari & David Evans & Mikhail Golosov & Thomas J. Sargent, 2013. "Taxes, Debts, and Redistributions with Aggregate Shocks," NBER Working Papers 19470, National Bureau of Economic Research, Inc.
    14. Beladi, Hamid & Chao, Chi-Chur & Hollas, Daniel, 2013. "How growing asset inequality affects developing economies," Journal of Economics and Business, Elsevier, vol. 68(C), pages 43-51.

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