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Endogenous trading constraints with incomplete asset markets

  • Ábrahám, Árpád
  • Cárceles-Poveda, Eva

This paper endogenizes the borrowing constraints on capital in a production economy with incomplete markets. We find that these limits get looser with income, a property that is consistent with US data on credit limits. The framework with endogenous limits is then used to study the effects of a revenue neutral tax reform that eliminates capital income taxes. Our results illustrate that it is very important to take into account the effects of tax policies on the limits. Throughout the transition, these effects can be big enough to change the overall conclusion about the desirability of a tax reform.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022-0531(09)00120-3
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 3 (May)
Pages: 974-1004

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:3:p:974-1004
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  18. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  19. Enrique G. Mendoza & Assaf Razin & Linda L. Tesar, 1994. "Effective Tax Rates in Macroeconomics: Cross-Country Estimates of Tax Rates on Factor Incomes and Consumption," NBER Working Papers 4864, National Bureau of Economic Research, Inc.
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