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Optimal Taxation With Endogenous Insurance Markets

  • Mikhail Golosov

We study optimal taxation in an economy where the skills of agents evolve stochastically over time and are private information and in which agents can trade unobservably in competitive markets. We show that competitive equilibria are constrained inefficient. The government can improve welfare by distorting capital accumulation with the sign of the distortion depending on the nature of the skill process. Finally, we show that private insurance provision responds endogenously to policy, that government insurance tends to crowd out private insurance, and, in a calibrated example, that this crowding out effect is large. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 122 (2007)
Issue (Month): 2 (05)
Pages: 487-534

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Handle: RePEc:tpr:qjecon:v:122:y:2007:i:2:p:487-534
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