Taxes, Transfers, and Employment in an Incomplete Markets Model

Jorge Alonso-Ortiz and Richard Rogerson
CQER Working Paper 10-07
December 2010

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Tax and transfer programs are analyzed in the context of a model with idiosyncratic productivity shocks and incomplete markets. The effects are contrasted with those obtained in a stand-in household model featuring no idiosyncratic shocks and complete markets. The main finding is that the impact on hours remains very large, but the welfare consequences are very different. The analysis also suggests that tax and transfer policies have large effects on average labor productivity via selection effects on employment.

JEL classification: E24, J22

Key words: taxes, transfers, employment

The authors thank Chris Sleet, an anonymous referee, and conference participants at the CEPR conference in Budapest in October 2008, the 2009 SED Meetings, and seminar participants at Yonsei University for valuable comments. Rogerson thanks the NSF as well as the Korean Science Foundation (WCU-R33-10005) for financial support. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Richard Rogerson (corresponding author), Department of Economics, Arizona State University, Tempe, AZ 85287,, or Jorge Alonso-Ortiz, Centro de Investigacion Economica, Instituto Tecnológico Autónomo de México, Av. Camino a Santa Teresa #30, Col. Héroes del Padierna, Del. Magdalena Contreras, Ciudad de México, D.F. 10700,

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