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http://hdl.handle.net/2451/27365
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| Title: | Private Insurance Markets or Redistributive Taxes? |
| Authors: | Krueger, Dirk
Perri, Fabrizio |
| Issue Date: | Mar-1999 |
| Series/Report no.: | S-MF-99-07 |
| Abstract: | We explore the welfare consequences of different taxation schemes in an
economy where agents are debt-constrained. If agents default on their
debt, they are banned from future intertemporal trade, but retain their
private (labor) endowments which are subject to income taxation. We
impose individual rationality constraints on agents guaranteeing no
default in equilibrium and we solve for efficient consumption
distribution across agents. A change in the tax system changes the
severity of punishment from default. We demonstrate that a change to a
more redistributive tax system leads to a restriction of the set of
contracts that are individually rational and that this restriction leads
to a limitation of possible risk sharing via private contracts. The
welfare consequences of a change in the tax system depend on the
relative magnitudes of increased risk sharing forced by the new tax
system and the reduced risk sharing in private insurance markets. We
quantitatively address this issue by calibrating an artificial economy
to US income and tax data. We show that for a plausible selection of the
structural parameters of our model, the change to a more redistributive
tax system leads to less risk sharing among individuals and, hence,
lower ex-ante welfare. |
| URI: | http://hdl.handle.net/2451/27365 |
| Appears in Collections: | Macro Finance
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