Tax and Transfer Programs in an Incomplete Markets Model

We assess the consequences of increases in the scale of tax and transfer programs in the context of a model with idiosyncratic productivity shocks and incomplete markets. We contrast the outcomes for both hours worked and welfare relative to the results obtained in a stand-in household model, featuring no idiosyncratic shocks and complete markets. Our main finding is that the impact on hours remains very large, but the welfare consequences are very different. The analysis also suggests that tax and transfer policies may have large effects on average labor productivity via selection effects on employment.