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 under borrowing constraints. 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 (in the absence of a lump-sum tax) to mitigate income risk without the need for lump-sum transfers, in contrast to the result obtained by Werning (2007), Azzimonti and Yared (2017), and Bhandari, Evans, Golosov, and Sargent (2017) in models 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

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2021-09-10

Number: 2021-002

Note: Publisher DOI: https://doi.org/10.1016/j.econlet.2021.110088

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• Working Paper Original (2021-02-09) : Why Might Lump-sum Transfers Not Be a Good Idea?