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Uninsured idiosyncratic risk and the government asset Laffer curve

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  • Nakajima, Tomoyuki
  • Takahashi, Shuhei

Abstract

We show that uninsured idiosyncratic earnings risk dramatically influences the long-run government asset Laffer curve, that is, the long-run relationship between government assets and the income from them, under zero taxes. In a heterogeneous agent model with uninsured idiosyncratic risk and a borrowing constraint, increasing government assets eventually decreases government asset income to negative values. In contrast, in a standard representative agent model, government asset income increases linearly with government assets. Under the baseline calibration, uninsured idiosyncratic risk reduces the maximum government asset income–output ratio to less than a quarter.

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  • Nakajima, Tomoyuki & Takahashi, Shuhei, 2022. "Uninsured idiosyncratic risk and the government asset Laffer curve," Journal of Macroeconomics, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:jmacro:v:71:y:2022:i:c:s0164070421000896
    DOI: 10.1016/j.jmacro.2021.103391
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    Cited by:

    1. Tchai Tavor & Limor Dina Gonen & Uriel Spiegel, 2022. "The Double-Peaked Shape of the Laffer Curve in the Case of the Inverted S-Shaped Labor Supply Curve," Mathematics, MDPI, vol. 10(6), pages 1-19, March.

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    More about this item

    Keywords

    Government assets; Laffer curve; Idiosyncratic risk; Zero taxes; Incomplete markets; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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