Optimal tax policies in dynamic models have unappealing features. In particular, optimal tax reform typically involves a large initial accumulation of government assets which is responsible for a large part of the welfare gains from optimal tax reform. In this paper, we investigate the...

even greater extent than what tax deductibility implies.

In an economy with distortionary taxes on labor, can subsidies on day care, financed by an increase in taxes, raise welfare by encouraging women with small children to work? We show, within a heterogeneous-agent life-cycle framework, that the Ramsey optimal policy consists in equalizing...

We investigate the welfare implications of changing a proportional capital income tax for a model economy in which heterogeneous households face labor income risk and trade only one asset. Labor taxes are adjusted at the time of the reform to maintain long run budget balance. Our stochastic...

The labor-supply elasticity is a central element in many macroeconomic models. We argue that assumptions underlying previous econometric estimates of the intertemporal labor supply elasticity are inconsistent with incomplete markets economies. In particular, if the econometrician ignores...

This article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes. We compare a representative-agent economy to an economy in which households face idiosyncratic uninsurable income risk. The income...

Many studies show that individuals do not perfectly smooth consumption at older ages. We argue that an important explanation is that health status declines with age, making consumption at older ages less desirable. We incorporate health status into a standard incomplete markets life-cycle model,...

We extend the Bewley-Aiyagari-Huggett model by incorporating an incomplete stock market and a persistent income process. In this quantitative general equilibrium framework, non-fundamental asset values are both large and desirable for realistic parameter values. However, if expectations shift...