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Working Paper
Optimal Social Insurance and Rising Labor Market Risk
Krebs, Tom; Scheffel, Martin (2019-02-01)
This paper analyzes the optimal response of the social insurance system to a rise in labor market risk. To this end, we develop a tractable macroeconomic model with risk-free physical capital, risky human capital (labor market risk) and unobservable effort choice affecting the distribution of human capital shocks (moral hazard). We show that constrained optimal allocations are simple in the sense that they can be found by solving a static social planner problem. We further show that constrained optimal allocations are the equilibrium allocations of a market economy in which the government ...
Opportunity and Inclusive Growth Institute Working Papers , Paper 18

Working Paper
Optimal Paternalistic Savings Policies
Olea de Souza e Silva, Pedro; Moser, Christian (2019-01-10)
We study optimal savings policies when there is a dual concern about undersaving for retirement and income inequality. Agents differ in present bias and earnings ability, both unobservable to a planner with paternalistic and redistributive motives. We characterize the solution to this two-dimensional screening problem and provide a decentralization using realistic policy instruments: mandatory savings at low incomes but a choice between subsidized savings vehicles at high incomes?resembling Social Security, 401(k), and IRA accounts in the US. Offering more savings choice at higher incomes ...
Opportunity and Inclusive Growth Institute Working Papers , Paper 17

Working Paper
Optimal Need-Based Financial Aid
Sachs, Dominik; Findeisen, Sebastian; Colas, Mark (2018-09-07)
We study the optimal design of student financial aid as a function of parental income. We derive optimal financial aid formulas in a general model. For a simple model version, we derive mild conditions on primitives under which poorer students receive more aid even without distributional concerns. We quantitatively extend this result to an empirical model of selection into college for the United States that comprises multidimensional heterogeneity, endogenous parental transfers, dropout, labor supply in college, and uncertain returns. Optimal financial aid is strongly declining in parental ...
Opportunity and Inclusive Growth Institute Working Papers , Paper 14

Report
Optimal Income Taxation: Mirrlees Meets Ramsey
Tsujiyama, Hitoshi; Heathcote, Jonathan (2015-01-22)
What structure of income taxation maximizes the social benefits of redistribution while minimizing the social harm associated with distorting the allocation of labor input? Many authors have advocated scrapping the current tax system, which redistributes primarily via marginal tax rates that rise with income, and replacing it with a flat tax system, in which marginal tax rates are constant and redistribution is achieved via non-means-tested transfers. In this paper we compare alternative tax systems in an environment with distinct roles for public and private insurance. We evaluate ...
Staff Report , Paper 507

Working Paper
Individual and Aggregate Constrained Efficient Intertemporal Wedges in Dynamic Mirrleesian Economies
Chen, Yunmin ; Chien, YiLi; Owyang, Michael T. (2015-12-21)
Assuming a neoclassical production technology, this paper characterizes constrained efficient intertemporal wedges for the macro aggregate as well as the micro individual allocation of dynamic Mirrleesian economies. We first construct ?Pareto-Negishi weights? from the multipliers on a sequence of temporary incentive constraints. For a fairly general stochastic process of idiosyncratic productivity shocks, we show that the evolution of the Pareto-Negishi weight associated with agents? consumption is a nonnegative martingale. This powerful property enables us to deliver three contributions to ...
Working Papers , Paper 2015-43

Working Paper
Optimal Fiscal Policy in Overlapping Generations Models
Garriga, Carlos (2017-05-22)
In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we find that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure.
Working Papers , Paper 2017-32

Working Paper
Openness and the Optimal Taxation of Foreign Know-How
Monge-Naranjo, Alexander (2016-10-01)
Developing countries frequently offer tax incentives and even subsidize the entry and operation of foreign firms. I examine the optimality of such policies in an economy where growth is driven by entrepreneurial know-how, a skill that is continuously updated on the basis of the productive ideas implemented in the country. Openness allows foreign ideas to disseminate inside a country and can foster the country's domestic accumulation of know- how. With externalities, however, laissez-faire openness is suboptimal and can be growth-and even welfare-reducing. I examine the gains from openness ...
Working Papers , Paper 2016-20

Working Paper
Optimal Ramsey Capital Income Taxation —A Reappraisal
Chien, YiLi; Wen, Yi (2017-08-18)
This paper addresses a long-standing problem in the optimal Ramsey capital taxation literature. The tractability of our model enables us to solve the Ramsey problem analytically along the entire transitional path. We show that the conventional wisdom on Ramsey tax policy and its underlying intuition and rationales do not hold in our model and may thus be misrepresented in the literature. We uncover a critical trade off for the Ramsey planner between aggregate allocative efficiency in terms of the modified golden rule and individual allocative efficiency in terms of self-insurance. Facing the ...
Working Papers , Paper 2017-24

Working Paper
Optimal Taxation, Marriage, Home Production, and Family Labor Supply
Gayle, George-Levi; Shephard, Andrew (2016-05-23)
An empirical approach to optimal income taxation design is developed within an equilibrium collective marriage market model with imperfectly transferable utility. Taxes distort labour supply and time allocation decisions, as well as marriage market outcomes, and the within household decision process. Using data from the American Community Survey and American Time Use Survey, we structurally estimate our model and explore empirical design problems. We consider the optimal design problem when the planner is able to condition taxes on marital status, as in the U.S. tax code, but we allow the ...
Working Papers , Paper 2016-10

Working Paper
Optimal Taxes Under Private Information: The Role of the Inflation Tax
Gomis-Porqueras, Pedro; Waller, Christopher J. (2017-05-31)
We consider an overlapping generation framework with search and private information to study optimal taxation. Agents sequentially trade in markets that are characterized by different frictions and trading protocols. In frictional decentralized markets, agents receive shocks that determine if they are going to be consumers or producers. Shocks are private information. Mechanism design is used to solve for the constrained optimal allocation. We then study whether a government can replicate the constrained optimal allocation with an array of policy instruments including fiat money. We show that ...
Working Papers , Paper 2017-14

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