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Subsidization and Stabilization: Optimal Employment Policy under Aggregate Uncertainty

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  • Puhakka, Mikko
  • Wright, Randall

Abstract

The authors study an economy where externalities provide an explicit role for intervention and technology shocks generate aggregate uncertainty. In laissez-faire there is too much unemployment. However, the authors show how to support the optimal allocation as a decentralized equilibrium using a self-financing linear employment subsidy. Generally, this subsidy is a function of economic conditions, and they characterize the way in which it varies with the shock. A special case of the authors' results indicates that a simple restriction on technology, homotheticity, implies the optimal subsidy is constant or independent of unemployment. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Puhakka, Mikko & Wright, Randall, 1991. "Subsidization and Stabilization: Optimal Employment Policy under Aggregate Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(2), pages 513-528, May.
    • Handle: RePEc:ier:iecrev:v:32:y:1991:i:2:p:513-28
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    Cited by:

    1. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
    2. Guo, Jang-Ting & Lansing, Kevin J., 2002. "Fiscal Policy, Increasing Returns, And Endogenous Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(5), pages 633-664, November.

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