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Redistribution Policy in a Model with Heterogeneous Time Preference

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Abstract

We examine how redistribution policy affects the distribution of income when human capital accumulation is endogenous and the fundamental source of heterogeneity in the economy stems from varying degrees of time preference across members of the population. In comparing the steady states of a dynamic general equilibrium model calibrated to the Canadian economy, we find that progressively more generous income transfer programs (financed with a flat income tax) lead to only modest decreases in income inequality, but significant increases in earnings inequality and large losses in per capita output. With the exception of the bottom income quintile, individuals display a strong preference for the long-run situation associated with the absence of government redistribution policy. Nevertheless, taking into account transition dynamics, a majority of individuals would vote for implementation of redistribution policy. The distribution of time-preference plays a critical role in generating this last result. Nous examinons comment les politiques redistributrices influencent la distribution du revenu lorsque l'accumulation de capital humain est endogène et que la source fondamentale de l'hétérogénéité dans l'économie provient des différents degrés de préférence pour le présent dans la population. En comparant les états stationnaires d'un modèle d'équilibre général dynamique étalonné pour le Canada, nous trouvons que des programmes de transferts de revenu plus généreux (financés par une imposition uniforme des revenus) ne mènent qu'à de faibles baisses de l'inégalité des revenus, mais augmentent significativement l'inégalité des salaires et mènent à de grandes pertes au niveau du capital par tête. À l'exception du quintile le plus faible, les individus ont une forte prédilection pour la situation de long terme associée à une absence de politique de redistribution. Malgré tout, une majorité vote pour une politique redistributrice en tenant compte des dynamiques de transition. La distribution de la préférence pour le présent joue un rôle crucial pour obtenir ces derniers résultats.

Suggested Citation

  • David Andolfatto & James Redekop, 1998. "Redistribution Policy in a Model with Heterogeneous Time Preference," Cahiers de recherche CREFE / CREFE Working Papers 66, CREFE, Université du Québec à Montréal.
    • Handle: RePEc:cre:crefwp:66
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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