Optimal Taxation in a Dynamic Model of Shirking and Unemployment: Shapiro and Stiglitz Meet Chamley
This paper analyzes optimal taxation in an efficiency-wage economy with involuntary unemployment, thereby extending Chamley’s (1986) optimal-tax analysis of the standard full-employment case. For this purpose, we introduce optimal savings into the shirking-unemployment model of Shapiro and Stiglitz (1984), and go beyond their exclusive focus on steady-state equilibrium. Our most surprising result is that despite the presence of jobless workers the government should impose a positive tax (rather than subsidy) on wage income in the long run, if the labor market is sufficiently distorted.
|Date of creation:||Jul 2007|
|Date of revision:||Aug 2010|
|Publication status:||Published: Revised version: A Dynamic Model of Shirking and Unemployment: Private Saving, Public Debt, and Optimal Taxation, Journal of Economic Dynamics and Control, Vol. 34, Issue 8. (August 2010), pp. 1392-1402|
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