Are Unconditional Lump-sum Transfers a Good Idea?

RePEc Short ID: pch650
ORCID iD: 0000-0002-6820-1197

Chen, Yunmin; Chien, YiLi; Wen, Yi; Yang, C. C.

doi:10.20955/wp.2021.002

Working Paper Revision

Are Unconditional Lump-sum Transfers a Good Idea?

Abstract: The role of unconditional lump-sum transfers in improving social welfare in heterogenous agent models has not been thoroughly understood in the literature. We adopt an analytically tractable Aiyagari-type model to study the distinctive role of unconditional lump-sum transfers in reducing consumption inequality due to ex-post uninsurable income risk. Our results show that in the presence of ex-post heterogeneity and in the absence of wealth inequality, unconditional lump-sum transfers are not a desirable tool for reducing consumption inequality—the Ramsey planner opts to rely solely on public debt and a linear labor tax to mitigate income risk without the need for lump-sum transfers, in sharp contrast to the result obtained by Werning (2007) in a model with ex-ante heterogeneity.

Keywords: Lump-sum Transfers; Universal Basic Income; Ramsey Problem; Public Liquidity; Incomplete Markets; Heterogeneous Agents;

JEL Classification: C61; E22; E62; H21; H30;

https://doi.org/10.20955/wp.2021.002

Status: Published in Economics Letters