Affordable Access

Publisher Website

A dynamic model of shirking and unemployment: Private saving, public debt, and optimal taxation

Authors
Journal
Journal of Economic Dynamics and Control
0165-1889
Publisher
Elsevier
Publication Date
Volume
34
Issue
8
Identifiers
DOI: 10.1016/j.jedc.2010.03.009
Keywords
  • Shirking
  • Unemployment
  • Saving
  • Public Debt
  • Optimal Taxation
Disciplines
  • Economics

Abstract

Abstract This paper introduces private saving and public debt into the shirking-unemployment model of Shapiro and Stiglitz (1984), while relaxing their exclusive focus on steady states. After generalizing their no-shirking constraint to accommodate asset accumulation, and demonstrating that the resulting economy’s equilibrium is saddle-path stable, we use our dynamic model to obtain significant departures from the Shapiro–Stiglitz prescriptions for optimal policy. Most notably, wage income should be taxed (not subsidized) in the long run if the labor market is sufficiently distorted. Furthermore, interest income should be (exhaustively) taxed only during an initial interval of time, as in Chamley’s (1986) full-employment model.

There are no comments yet on this publication. Be the first to share your thoughts.