Essays on fiscal policy in heterogeneous agent models

Jiang, Wei (2013) Essays on fiscal policy in heterogeneous agent models. PhD thesis, University of Glasgow.

Abstract

This thesis consists of three inter-related chapters designed to study the effects of fiscal policy on unemployment, the distribution of income, and social welfare in heterogeneous agent models incorporating unemployment. Each chapter employs a different setup for unemployment in a general equilibrium framework. These include models of equilibrium unemployment, right-to-manage union bargaining, and search and matching. Chapter 1 develops a model with equilibrium unemployment to study the effects of optimal taxation under commitment. Two models are explored: a model with zero economic profits and a model with non-zero economic profits due to the presence of productive public investment. We find that the optimal policy in these two models results in a different labour wedge which defines the gap between the marginal rate of substitution between labour and consumption and the marginal product of labour. In particular, the labour wedge can only be completely eliminated when the profits are absent from the model. It is further demonstrated that there exists a trade-off between efficiency and equity for the government in the model with non-zero economic profits. Chapter 2 examines the importance of imperfect competition in labour and product markets in determining the welfare effects of tax reforms assuming agent heterogeneity in capital holdings. The analysis shows that each of these market distortions, independently, results in welfare losses for at least one segment of the population after a capital tax cut and a concurrent labour tax increase. However, with both present in the model, the tax reform is Pareto improving in a realistic calibration to the UK economy. Chapter 3 extends a Mortensen-Pissarides search-and-matching framework with household heterogeneity to investigate the importance of search frictions in determining the welfare and distributional effects of tax reforms which re-allocate the tax burden from capital to labour income. The optimal tax policy under commitment is also analysed. We find that the tax reforms are Pareto improving in the long run, despite welfare losses for at least one segment of the population in the transition period. Finally, the long-run Ramsey policy implies a negative capital tax which is associated with a rise in the labour tax and a fall in the unemployment benefit.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Additional Information: A paper based on the second chapter of my PhD thesis has been published at the European Economic Review in 2013.
• Keywords: Tax reforms, optimal fiscal policy, unemployment, heterogeneous agent, labour and product market distortions
• Subjects: H Social Sciences > HB Economic Theory
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Economics
• Supervisor's Name: Malley, Prof. Jim and Angelopoulos, Dr. Konstantinos
• Date of Award: 2013
• Depositing User: Dr. Wei Jiang
• Unique ID: glathesis:2013-4148
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 28 Mar 2013 12:48
• Last Modified: 28 Mar 2013 12:48
• URI: https://theses.gla.ac.uk/id/eprint/4148