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Tax and Transfer Programs in an Incomplete Markets Model


  • Alonso Ortiz, Jorge
  • Rogerson, Richard


We assess the consequences of increases in the scale of tax and transfer programs in the context of a model with idiosyncratic productivity shocks and incomplete markets. We contrast the outcomes for both hours worked and welfare relative to the results obtained in a stand-in household model, featuring no idiosyncratic shocks and complete markets. Our main finding is that the impact on hours remains very large, but the welfare consequences are very different. The analysis also suggests that tax and transfer policies may have large effects on average labor productivity via selection effects on employment.

Suggested Citation

  • Alonso Ortiz, Jorge & Rogerson, Richard, 2009. "Tax and Transfer Programs in an Incomplete Markets Model," MPRA Paper 18487, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:18487

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    References listed on IDEAS

    1. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, Oxford University Press, vol. 109(3), pages 659-684.
    2. David Card, 1990. "Intertemporal Labor Supply: An Assessment," Working Papers 649, Princeton University, Department of Economics, Industrial Relations Section..
    3. Bencivenga, Valerie R, 1992. "An Econometric Study of Hours and Output Variation with Preference Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 449-471, May.
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    Heterogeneous agents; idiosyncratic labor income risk; employment;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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