Optimal Government Policies in Models with Heterogeneous Agents
We develop a new methodology for finding optimal government policies in economies with heterogeneous agents. The methodology is solely based on three classes of equilibrium conditions from the government's and individual agent's optimization problems: 1) the first order conditions; 2) the stationarity condition on the distribution function; and, 3) the aggregate market clearing conditions. The solution takes into account simultaneously the effect of government policy on individual allocations and (from the government's point of view) optimal distribution of agents in the steady state. We illustrate it on a steady state Ramsey problem with heterogeneous agents, finding the optimal tax schedule.
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