Diversity and Economic Performance in a Model with Progressive Taxation

Is a more heterogeneous population beneficial or harmful to long-term economic performance? This paper addresses this and other questions in a dynamic general equilibrium model where consumers have different labour productivity and time preference. We show how differences in the cross-sectional distribution of these characteristics can affect the economy via two channels. The first one involves changing the composition of the labour force; and the second one involves changing the cross-sectional distribution of marginal tax rate. We show how these channels are, respectively, determined by the shape of the labour supply function and the curvature of the marginal tax function.