Optimal government policies in models with heterogeneous agents

0490141 - NHU-C 2019 RIV US eng J - Journal Article
Boháček, Radim - Kejak, Michal
Optimal government policies in models with heterogeneous agents.
Journal of Economic Theory. Roč. 176, July (2018), s. 834-858. ISSN 0022-0531. E-ISSN 1095-7235
R&D Projects: GA ČR(CZ) GBP402/12/G097
Institutional support: Progres-Q24
Keywords : macroeconomic policy * optimal taxation * computational techniques
OECD category: Economic Theory
Impact factor: 1.181, year: 2018

In this paper we develop a new approach for finding optimal government policies in economies with heterogeneous agents. Using the calculus of variations, we present three classes of equilibrium conditions from government's and individual agent's optimization problems: 1) the first order conditions: the government's Lagrange–Euler equation and the individual agent's Euler equation, 2) the stationarity condition on the distribution function, and, 3) the aggregate market clearing conditions. These conditions form a system of functional equations which we solve numerically. The solution takes into account simultaneously the effect of the government policy on individual allocations, the resulting optimal distribution of agents in the steady state and, therefore, equilibrium prices. We illustrate the methodology on a Ramsey problem with heterogeneous agents, finding the optimal limiting tax on total income.
Permanent Link: http://hdl.handle.net/11104/0284432