Elastic Labour Supply and Optimal Taxation in a Model of Sustainable Endogenous Growth

IHS Economics Series Working Paper 105

October 2001

Elastic Labour Supply and Optimal Taxation in a Model of Sustainable Endogenous Growth

Corrado Di Maria

Impressum Author(s):

Corrado Di Maria Title:

Elastic Labour Supply and Optimal Taxation in a Model of Sustainable Endogenous Growth

ISSN: Unspecified

2001 Institut für Höhere Studien - Institute for Advanced Studies (IHS) Josefstädter Straße 39, A-1080 Wien

E-Mail: o ce@ihs.ac.atffi Web: ww w .ihs.ac. a t

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This paper is available for download without charge at:

https://irihs.ihs.ac.at/id/eprint/1376/

Elastic Labour Supply and Optimal Taxation in a Model

of Sustainable Endogenous Growth

Corrado Di Maria

105

Reihe Ökonomie

Economics Series

105 Reihe Ökonomie Economics Series

Elastic Labour Supply and Optimal Taxation in a Model

of Sustainable Endogenous Growth

Corrado Di Maria October 2001

Institut für Höhere Studien (IHS), Wien

Institute for Advanced Studies, Vienna

Contact:

Corrado Di Maria

Institute for Advanced Studies Stumpergasse 56, A -1060 Vienna (: +43/1/599 91-183

email: cdimaria@ihs.ac.at or

CentER

Tilburg University P.O. Box 90153

NL-5000 LE Tilburg, The Netherlands (: +31-13-4663149 (at KUB) email: C.diMaria@kub.nl

Founded in 1963 by two prominent Austrians living in exile – the sociologist Paul F. Lazarsfeld and the economist Oskar Morgenstern – with the financial support from the Ford Foundation, the Austrian Federal Ministry of Education and the City of Vienna, the Institute for Advanced Studies (IHS) is the first institution for postgraduate education and research in economics and the social sciences in Austria. The Economics Series presents research done at the Department of Economics and Finance and aims to share “work in progress” in a timely way before formal publication. As usual, authors bear full responsibility for the content of their contributions.

Das Institut für Höhere Studien (IHS) wurde im Jahr 1963 von zwei prominenten Exilösterreichern – dem Soziologen Paul F. Lazarsfeld und dem Ökonomen Oskar Morgenstern – mit Hilfe der Ford- Stiftung, des Österreichischen Bundesministeriums für Unterricht und der Stadt Wien gegründet und ist somit die erste nachuniversitäre Lehr- und Forschungsstätte für die Sozial- und Wirtschafts - wissenschaften in Österreich. Die Reihe Ökonomie bietet Einblick in die Forschungsarbeit der Abteilung für Ökonomie und Finanzwirtschaft und verfolgt das Ziel, abteilungsinterne Diskussionsbeiträge einer breiteren fachinternen Öffentlichkeit zugänglich zu machen. Die inhaltliche Verantwortung für die veröffentlichten Beiträge liegt bei den Autoren und Autorinnen.

Abstract

This paper presents an endogenous growth model which features elastic labour supply in order to address the distortions created by labour income and consumption taxation.

Introducing elastic labour into an AK model greatly changes the structure of the model and raises problems regarding the existence and the stability of a balanced growth path. Another important feature of this paper is the presence of environmental quality both in the utility and in the production functions and the requirement that the growth path of the economy be environmentally sustainable. Within the framework outlined, the focus of the analysis is on optimal taxation and on the effects of government policy on the growth path of the economy.

The basic result is that even in this simple setting the interaction between the economic and the ecological system are complex and the policy outcomes crucially depend on the parameters of the model.

Keywords

Endogenous growth, sustainable growth, environmental externalities, elastic labour supply, optimal taxation

JEL Classifications

O41, D62, Q28, E62

Comments

I would like to thank my supervisor Jamsheed Shorish for his many suggestions and his infinite patience. Special thanks also to Walter Fisher for his many comments and his encouragement. One last mention to Gottfried Steindl, who codiscussed this paper during the annual conference at the IHS, for his friendship and good advice. All remaining errors are of course mine.

Contents

1 Introduction 1

2 The Model 2

2.1 The Centralised Problem ...3

2.2 The Decentralised Problem...8

2.3 Optimal Taxation ... 12

3 Conclusions 13 4. Appendix 15

4.2 Stability Analysis in the Decentralised Problem ... 15

4.3 Comparative Statics in the Centralised Problem ... 16

4.4 Comparative Statics in the Decentralised Problem ... 17

References 18

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46

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49

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^43` Uxelr/ V1M1 dqg M1D}qdu ^5333` Vxvwdlqdeoh Jurzwk dqg Hqylurqphqwdo Srolflhv/ IHHPQrwh gl Odyrur 582331

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^46` Wxuqryvn|/ V1M1 ^4<<9` Rswlpdo Wd{/ Ghew dqg H{shqglwxuh Srolflhv lq d Jurzlqj Hfrqrp|/ Mrxuqdo ri Sxeolf Hfrqrplfv 93= 540771

4;

Author: Corrado Di Maria

Title: Elastic Labour Supply and Optimal Taxation in a Model of Sustainable Endogenous Growth Reihe Ökonomie / Economics Series 105

Editor: Robert M. Kunst (Econometrics)

Associate Editors: Walter Fisher (Macroeconomics), Klaus Ritzberger (Microeconomics)

ISSN: 1605-7996

© 2001 by the Department of Economics and Finance, Institute for Advanced Studies (IHS), Stumpergasse 56, A-1060 Vienna • ( +43 1 59991-0 • Fax +43 1 5970635 • http://www.ihs.ac.at

ISSN: 1605-7996