Optimal Capital Income Taxation With Incomplete Markets, Borrowing Constraints, and Constant Discounting

Tax and Education Policy in a Heterogeneous Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?

“…The framework proposed here allows new developments on both the theoretical and the quantitative fronts. The second strand of literature deals with the implications of imperfect insurance markets for savings behavior and wealth inequality on the one hand (e.g., Laitner (1992), Aiyagari (1995), Heaton and Lucas (1996), Krusell and Smith (1998)), for public insurance on the other (e.g., Varian (1980), Hansen and Imrohoglu (1992), Atkeson and Lucas (1995)). The present paper abstracts from precautionary savings, which figure prominently in some of these models.…”

Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

“…REMARK 1: The notion of overinvestment as well as the underlying logic of Proposition 2 are very different from those in Aiyagari (1995). To see this, notice that our results hold irrespective of whether a precautionary motive is present or not, or whether the level of the equilibrium interest rate is lower or higher than its level when markets are complete.…”

“…In our two-period environment we cannot address important issues, such as the intertemporal allocation of the tax burden examined in the literature starting with Judd (1985) and Chamley (1986) in a complete market setting and continuing with Aiyagari (1995) when markets are incomplete. So an extension to an infinite horizon setup is an important next step.…”

“…A possible answer may come from the following consequence of the agents' precautionary motive for saving: under uninsurable risk, this motive implies that savings and hence capital accumulation will be higher compared to the situation where markets are complete. This point was made in an influential paper by Aiyagari (1995Aiyagari ( , p. 1160) and in fact various papers thereafter suggested that with incomplete markets, the precautionary saving motive leads to overaccumulation of capital and hence that a positive tax on capital is welfare-improving. 2 However, the comparison between the level of capital accumulation with and without complete markets has no clear welfare implication.…”

From Micro to Macro: Public Polices and Aggregate Economic Performance

“…10 The latter effect can be shown to dominate in an economy with consumers with long time horizons. The result does, however, turn out to be quite special, holding only under very restrictive assumptions (see Aiyagari (1995)). Hence, it is not clear that the practical force of these models is particularly great.…”