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Taxation of Labor Income and the Demand For Risky Assets

  • Douglas W. Elmendorf
  • Miles S. Kimball

The effect of uninsured labor income risk on the joint saving/portfolio composition decision is analyzed using new techniques from the theory of multiple risk-bearing. Applying this analysis, the effect of labor income taxes on the demand for risky securities is considered. It is well known that when private insurance markets are incomplete, the insurance afforded by labor income taxes can reduce overall saving. This paper establishes that - given plausible restrictions on preferences - the insurance afforded by labor income taxes increases the demand for risky securities, even when labor income is statistically independent of the returns to risky securities.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3904.

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Date of creation: Nov 1991
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Publication status: published as Elmendorf, Douglas W. and Miles S. Kimball. "Taxation Of Labor Income And The Demand For Risky Assets," International Economic Review, 2000, v41(3,Aug), 801-832.
Handle: RePEc:nbr:nberwo:3904
Note: AP PE
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