Research Paper Consumption Taxes and Divisibility of Labor under Incomplete Markets

Nakajima, Tomoyuki  ,  Takahashi, Shuhei

9332016-02-05 , Institute of Economic Research, Kyoto University
We analyze lump-sum transfers financed through consumption taxes in a heterogeneousagent model with uninsured idiosyncratic wage risk and endogenous labor supply. The model is calibrated to the U.S. economy. We find that consumption inequality and uncertainty decrease with transfers much more substantially under divisible than indivisible labor. Increasing transfers by raising the consumption tax rate from 5% to 35% decreases the consumption Gini by 0.04 under divisible labor, whereas it has almost no effect on the consumption Gini under indivisible labor. The divisibility of labor also affects the relationship among consumption-tax financed transfers, aggregate saving, and the wealth distribution.

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