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The Welfare Cost of Imperfect Competition and Distortionary Taxation

  • Jonsson, Magnus


    (Research Department, Central Bank of Sweden)

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    The welfare cost of imperfect competition in the product and labor market as well as distortionary taxation is quantified in a dynamic general equilibrium model parameterized to fit the U.S. economy. We find that the welfare cost of imperfect competition in the product market is 35.74 percent while it is 0.66 percent in the labor market, taking the transition from the distorted to the optimal steady state into account. If we also take into account that the U.S. economy is characterized by distortionary taxation the welfare cost in the product market increases to 48.26 percent and 4.70 percent in the labor market.

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    Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 170.

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    Length: 31 pages
    Date of creation: 01 Oct 2004
    Date of revision:
    Handle: RePEc:hhs:rbnkwp:0170
    Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
    Phone: 08 - 787 00 00
    Fax: 08-21 05 31
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    9. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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    18. David Domeij & Martin Floden, 2006. "The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 242-262, April.
    19. Sébastien Jean & Giuseppe Nicoletti, 2004. "Regulation and Wage Premia," Working Papers 2004-12, CEPII research center.
    20. Mendoza, Enrique G. & Razin, Assaf & Tesar, Linda L., 1994. "Effective tax rates in macroeconomics: Cross-country estimates of tax rates on factor incomes and consumption," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 297-323, December.
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