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|
|Contact details of provider:|| Postal: C870 Loeb Building, 1125 Colonel By Drive, Ottawa Ontario, K1S 5B6 Canada|
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References listed on IDEAS
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- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
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- R.A. Brecher & Z. Chen & E.U. Choudhri, 2000. "Unemployment and Growth in the Long Run: An Efficiency-Wage Model with Optimal Savings," Carleton Economic Papers 00-01, Carleton University, Department of Economics, revised Sep 2002.
- Stephen J. Turnovsky, 2000. "Methods of Macroeconomic Dynamics, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262201232, March.
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- Michelle Alexopoulos, 2006. "Shirking in a monetary business cycle model," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 689-718, August.
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