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Risk Taking and Optimal Taxation in the Presence of Nontradable Human Capital

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  • Zuliu Hu

    (International Monetary Fund)

Abstract

This paper demonstrates that the stream of uncertain income from human capital has systematic effects on the demand for risky physical capital assets. If labor supply is inelastic and real wages are known with certainty, then a labor income tax will reduce holdings of the risky physical asset. However, if labor income fluctuates randomly, a labor income tax may actually raise demand for the asset if human capital risk and physical capital risk are positively correlated. The idiosyncratic risk and nontradability of human capital also have implications for optimal taxation.

Suggested Citation

  • Zuliu Hu, 1993. "Risk Taking and Optimal Taxation in the Presence of Nontradable Human Capital," IMF Staff Papers, Palgrave Macmillan, vol. 40(3), pages 622-637, September.
    • Handle: RePEc:pal:imfstp:v:40:y:1993:i:3:p:622-637
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    Cited by:

    1. Daehwan Kim & Jin-Yeong Kim, 2011. "Valuing Income-Contingent Loans as Path-Dependent Options," Korean Economic Review, Korean Economic Association, vol. 27, pages 273-291.
    2. David E. Wildasin, 2000. "Labor-Market Integration, Investment in Risky Human Capital, and Fiscal Competition," American Economic Review, American Economic Association, vol. 90(1), pages 73-95, March.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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