Integrated aggregation in dynamic economies

The paper provides necessary and sufficient conditions for aggregation of heterogeneousindividuals in dynamic economies, when individuals differ in abilities as well as in capitalendowments, and when there are distortionary taxes. The aggregation theorems imply that thecompetitive equilibrium can be represented as if there was only one individual in theeconomy. This considerably facilitates analysis of the aggregate economy, such as stabilityanalysis, as well as of the distribution of wealth. Furthermore, the paper provides conditionsunder which a representative individual coincides with one of the individuals in the economy

Relative capital accumulation with heterogeneous individuals

The purpose of this paper is to show how differences in individuals’ labour productivitiescause differences in their accumulation of capital, and thereby analysing the evolution of theincome distribution. There are three cases of interest: (i) the high productive accumulaterelatively more capital [growing inequality], (ii) no individual accumulates relatively morecapital [neutrality], (iii) the low productive accumulate relatively more [diminishinginequality]. Which of these cases is generated depends on the price dynamics (the growth rateof wages and the level of the interest rate relative to the rate of time preference), togetherwith the preferences for consumption. The exact conditions for the price dynamics to generate(i), (ii) and (iii) are derived. Furthermore, since the price dynamics is endogenous in generalequilibrium, we find the conditions for preferences and technology that determine relativecapital accumulation. We find (in general equilibrium) that growing economies typically causethe high productive to accumulate more capital than the low productive if preferences areDecreasing Absolute Risk Aversion, and shrinking economies cause the less productive toaccumulate more (i.e. decumulate less). The relations are reversed for Constant and IncreasingRelative Risk Aversion. The final part of the paper analyses the effects of capital taxation onthe income distribution

Privately provided public goods in a dynamic economy

We show that when individuals can save (accumulate capital), they all eventually becomepublic-good contributors. In steady state, larger economies have more contributors. If thepublic good is normal, then its quantity increases in population size in the open-loopequilibrium, but not necessarily in the feedback equilibrium. If both private and public goodsare normal, then the open-loop equilibrium exhibits greater steady-state public provision thanthe feedback equilibrium. If private consumption is inferior the opposite is true. Interpretingindividuals as countries, our findings suggest that all countries over time will becomecontributors toward a global public good

Optimal taxation, critical-level utilitarianism and economic growth

In this work we analyze the issue of taxation in an intertemporal economywith endogenous fertility under critical-level utilitarianism, both from apositive and normative standpoint. On the positive side we analyse theeffects of a change in the tax on capital income and on the population size,both separately and in a policy aiming at maintaining per-capita debtconstant. On the normative side, we characterize the first-best and second-best optimal tax structures both when labour supply is exogenous andendogenous

Inequality, Environmental Protection and Growth

Why do Scandinavian countries perform better in terms of environmental protection than other European Union countries? In this paper, we explore the hypothesis that societies characterised by low income inequality (such as the nordic European countries) generate political-economic equilibria where environmental policy is more stringent. We model an overlapping-generations economy in which individuals differ in skills to address the question to what extent in modern democracies, income distribution influences the stringency of environmental policy and consequently the growth of a country. Individuals work when they are young and own capital when they are old. Pollution externalities are present due to the use of a polluting factor. The government uses the revenue from a capital-income tax and a pollution tax for a lump-sum transfer to the old generation. The fiscal decision at each point in time is taken by a majority elected representative. In politico-economic equilibrium, the lower the skill of the median individual is relative to the average, the smaller the pollution tax and the capital stock are, and the greater the capital income-tax and the relative use of the polluting factor. We perform both steady-state analysis and examine the transition path. Subsequently, we present an empirical analysis for two panels of seven and ten industrialised countries from the late seventies to late nineties. Our framework is able to explain the stylised facts regarding inequality, environmental protection, and growth

Optimal taxation, critical-level utilitarianism and economic growth

In this work we analyze the issue of taxation in an intertemporal economy with endogenous fertility under critical-level utilitarianism, both from a positive and normative standpoint. On the positive side we analyse the effects of a change in the tax on capital income and on the population size, both separately and in a policy aiming at maintaining per-capita debt constant. On the normative side, we characterize the first-best and second- best optimal tax structures both when labour supply is exogenous and endogenous.Taxation, endogenous fertility, critical level utilitarianism, population.

Privately provided public goods in a dynamic economy

We show that when individuals can save (accumulate capital), they all eventually become public-good contributors. In steady state, larger economies have more contributors. If the public good is normal, then its quantity increases in population size in the open-loop equilibrium, but not necessarily in the feedback equilibrium. If both private and public goods are normal, then the open-loop equilibrium exhibits greater steady-state public provision than the feedback equilibrium. If private consumption is inferior the opposite is true. Interpreting individuals as countries, our findings suggest that all countries over time will become contributors toward a global public good.private provision, public goods, dynamic, intertemporal, differential game

Integrated Aggregation in Dynamic Economies

The paper provides necessary and sufficient conditions for aggregation of heterogeneous individuals in dynamic economies, when individuals differ in abilities as well as in capital endowments, and when there are distortionary taxes. The aggregation theorems imply that the competitive equilibrium can be represented as if there was only one individual in the economy. This considerably facilitates analysis of the aggregate economy, such as stability analysis, as well as of the distribution of wealth. Furthermore, the paper provides conditions under which a representative individual coincides with one of the individuals in the economy.Aggregation, economic dynamics, heterogeneity

Relative capital accumulation with heterogeneous individuals

The purpose of this paper is to show how differences in individuals’ labour productivities cause differences in their accumulation of capital, and thereby analysing the evolution of the income distribution. There are three cases of interest: (i) the high productive accumulate relatively more capital [growing inequality], (ii) no individual accumulates relatively more capital [neutrality], (iii) the low productive accumulate relatively more [diminishing inequality]. Which of these cases is generated depends on the price dynamics (the growth rate of wages and the level of the interest rate relative to the rate of time preference), together with the preferences for consumption. The exact conditions for the price dynamics to generate (i), (ii) and (iii) are derived. Furthermore, since the price dynamics is endogenous in general equilibrium, we find the conditions for preferences and technology that determine relative capital accumulation. We find (in general equilibrium) that growing economies typically cause the high productive to accumulate more capital than the low productive if preferences are Decreasing Absolute Risk Aversion, and shrinking economies cause the less productive to accumulate more (i.e. decumulate less). The relations are reversed for Constant and Increasing Relative Risk Aversion. The final part of the paper analyses the effects of capital taxation on the income distribution.Consumer heterogeneity, income distribution dynamics, relative capital accumulation, taxation.