IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The political economy of labor subsidies

  • Marina Azzimonti

    ()

    (Economics University of Iowa)

  • Eva de Francisco
  • Per Krusell

We explore a political-economy model of labor subsidies, extending Meltzer and Richard's median-voter model to a dynamic setting. We explore only one source of heterogeneity: initial wealth. As a consequence, given an operative wealth effect, poorer agents work harder, and if the agent with median wealth is poorer than average, a politico-economic equilibrium will feature a subsidy to labor. The dynamic model does not have capital, but it has perfect markets for borrowing and lending. This means that another channel appears: tax rates influence interest rates, and this is another channel for redistribution, since a decrease in current interest rates favors agents with below-average wealth. By the same token---and as is typically the case in dynamic politico-economic models with rational agents---the setting features time-inconsistency: the median voter would like to commit not to manipulate interest rates in the future. We define a time-consistent politico-economic equilibrium without commitment as a Markov-perfect equilibrium of a dynamic game between consecutive median voters. We rely on utility functions consistent with aggregation, and we show that, for arbitrary wealth distributions, politico-economic equilibria deliver tax outcomes as a function of a single state variable: median wealth. We use the first-order condition of the median voter to characterize equilibrium. For a parametric example, we study in some detail, both in infinite- and short-horizon contexts, and using a combination of analytical and numerical results, how tax rates and inequality are determined over time

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 588.

as
in new window

Length:
Date of creation: 03 Dec 2006
Date of revision:
Handle: RePEc:red:sed006:588
Contact details of provider: Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Fax: 1-314-444-8731
Web page: http://www.EconomicDynamics.org/society.htm
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Per Krusell & Anthony A. Smith, Jr., 2003. "Consumption--Savings Decisions with Quasi--Geometric Discounting," Econometrica, Econometric Society, vol. 71(1), pages 365-375, January.
  2. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  3. Per Krusell & Jose-Victor Rios-Rull, 1997. "On the size of U.S. government: political economy in the neoclassical growth model," Staff Report 234, Federal Reserve Bank of Minneapolis.
  4. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith Jr., 2001. "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," Temi di discussione (Economic working papers) 413, Bank of Italy, Economic Research and International Relations Area.
  5. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  6. 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.
  7. Klein, Paul & Krusell, Per & Ríos-Rull, José-Víctor, 2004. "Time Consistent Public Expenditures," CEPR Discussion Papers 4582, C.E.P.R. Discussion Papers.
  8. Marco Bassetto & Jess Benhabib, 2006. "Redistribution, taxes, and the median voter," Working Paper Series WP-06-02, Federal Reserve Bank of Chicago.
  9. Marina Azzimonti & Eva de Francisco & Per Krusell, 2006. "Median-voter Equilibria in the Neoclassical Growth Model under Aggregation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 108(4), pages 587-606, December.
  10. 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.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:red:sed006:588. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.