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Ricardian Equivalence with Wage-Rate Uncertainty

  • Croushore, Dean

This paper examines Ricardian equivalence when the wage rate is uncertain and people choose their labor supply. The author reviews the model of Robert B. Barsky, Gregory Mankiw, and Stephen P. Zeldes (1986) and shows that their finding of a positive marginal propensity to consume out of a tax cut is due to the insurance aspect of distortionary taxation. Then the author explores the trade-off between this insurance aspect and labor-supply distortions in the context of a model similar to that of Barsky, Mankiw, and Zeldes but incorporating labor supply. Copyright 1996 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 28 (1996)
Issue (Month): 3 (August)
Pages: 279-93

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Handle: RePEc:mcb:jmoncb:v:28:y:1996:i:3:p:279-93
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  1. Barsky, Robert B & Mankiw, N Gregory & Zeldes, Stephen P, 1986. "Ricardian Consumers with Keynesian Propensities," American Economic Review, American Economic Association, vol. 76(4), pages 676-91, September.
  2. Fremling, Gertrud M & Lott, John R, Jr, 1994. "Do Deficits Affect the Level of Insurance?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 934-40, November.
  3. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics 9411003, EconWPA.
  4. Robert J. Barro, 1988. "The Ricardian Approach to Budget Deficits," Working Papers 728, Queen's University, Department of Economics.
  5. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings Uncertainty and Precautionary Saving," CEPR Discussion Papers 699, C.E.P.R. Discussion Papers.
  6. Jonathan Eaton & Harvey S. Rosen, 1980. "Optimal Redistributive Taxation and Uncertainty," The Quarterly Journal of Economics, Oxford University Press, vol. 95(2), pages 357-364.
  7. Skinner, Jonathan, 1988. "Risky income, life cycle consumption, and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 22(2), pages 237-255, September.
  8. Hans-Werner Sinn, 1994. "A Theory of the Welfare State," NBER Working Papers 4856, National Bureau of Economic Research, Inc.
  9. Caballero, Ricardo J., 1990. "Consumption puzzles and precautionary savings," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 113-136, January.
  10. Kimball, Miles S & Mankiw, N Gregory, 1989. "Precautionary Saving and the Timing of Taxes," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 863-79, August.
  11. Stephen P. Zeldes, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 275-298.
  12. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March.
  13. Andrew B. Abel, . "The Implications of Insurance for the Efficacy of Fiscal Policy," Rodney L. White Center for Financial Research Working Papers 06-88, Wharton School Rodney L. White Center for Financial Research.
  14. Hansson, Ingemar & Stuart, Charles, 1985. "Tax revenue and the marginal cost of public funds in Sweden," Journal of Public Economics, Elsevier, vol. 27(3), pages 331-353, August.
  15. Dreze, Jacques H. & Modigliani, Franco, 1972. "Consumption decisions under uncertainty," Journal of Economic Theory, Elsevier, vol. 5(3), pages 308-335, December.
  16. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  17. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  18. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  19. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  20. Stern, N. H., 1976. "On the specification of models of optimum income taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 123-162.
  21. Chan, Louis Kuo Chi, 1983. "Uncertainty and the neutrality of government financing policy," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 351-372.
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