Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?
Article first published online: 12 DEC 2003
The Econometric Society 2002
Volume 70, Issue 2, pages 481–517, March 2002
How to Cite
Bénabou, R. (2002), Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?. Econometrica, 70: 481–517. doi: 10.1111/1468-0262.00293
- Issue published online: 12 DEC 2003
- Article first published online: 12 DEC 2003
- heterogeneous agents;
- income distribution;
- education finance;
This paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous-agent economy. Such redistributive policies entail distortions to labor supply and savings, but also serve as partial substitutes for missing credit and insurance markets. The resulting tradeoffs for growth and efficiency are explored, both theoretically and quantitatively, in a model that yields complete analytical solutions. Progressive education finance always leads to higher income growth than taxes and transfers, but at the cost of lower insurance. Overall efficiency is assessed using a new measure that properly reflects aggregate resources and idiosyncratic risks but, unlike a standard social welfare function, does not reward equality per se. Simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude, resulting in plausible values for the optimal rates. Aggregate income and aggregate welfare provide only crude lower and upper bounds around the true efficiency tradeoff.