Paper by Sebastian Dyrda and Marcelo Pedroni in The Review of Economic Studies

Abstract

This article examines the optimal design of fiscal policy by governments to address household inequality and risk, considering both the present economic conditions and the necessary transition away from them. The findings indicate that a utilitarian planner would increase the welfare system in the US by approximately 50%, financing it through higher capital and labor taxes. Further, the article shows that enhanced equity also improves economic efficiency by incentivizing productive households to work relatively more.

Article citation and access to full article:

Sebastian Dyrda, Marcelo Pedroni, Optimal Fiscal Policy in a Model with Uninsurable Idiosyncratic Income Risk, The Review of Economic Studies, Volume 90, Issue 2, March 2023, Pages 744–780, https://doi.org/10.1093/restud/rdac031