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On the political economy of income redistribution and crime

  • Ayse Imrohoroglu
  • Antonio Merlo
  • Peter Rupert

We study a one-sector growth model which is standard except for the presence of an externality in the production function. The set of competitive equilibria is large. It includes constant equilibria, sunspot equilibria, cyclical and chaotic equilibria, and equilibria with deterministic or stochastic regime switching. The efficient allocation is characterized by constant employment and a constant growth rate. We identify an income tax-subsidy schedule that supports the efficient allocation as the unique equilibrium outcome. That schedule has two properties: (i) it specifies the tax rate to be an increasing function of aggregate employment, and (ii) earnings are subsidized when aggregate employment is at its efficient level. The first feature eliminates inefficient, fluctuating equilibria, while the second induces agents to internalize the externality.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 216.

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Date of creation: 1996
Date of revision:
Handle: RePEc:fip:fedmsr:216
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  13. Tauchen, Helen & Witte, Ann Dryden & Griesinger, Harriet, 1994. "Criminal Deterrence: Revisiting the Issue with a Birth Cohort," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 399-412, August.
  14. S. Rae Aiyagari & Dan Peled, 1995. "Social insurance and taxation under sequential majority voting and utilitarian regimes," Staff Report 197, Federal Reserve Bank of Minneapolis.
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  19. Isaac Ehrlich, 1996. "Crime, Punishment, and the Market for Offenses," Journal of Economic Perspectives, American Economic Association, vol. 10(1), pages 43-67, Winter.
  20. Meltzer, Allan H & Richard, Scott F, 1981. "A Rational Theory of the Size of Government," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 914-27, October.
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