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Macroeconomic Dynamics Macroeconomic Dynamics

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INFRASTRUCTURE AND INEQUALITY: INSIGHTS FROM INCORPORATING KEY ECONOMIC FACTS ABOUT HOUSEHOLD HETEROGENEITY

Published online by Cambridge University Press:  01 August 2016

David Klenert ,
Linus Mattauch ,
Ottmar Edenhofer  and
Kai Lessmann
David Klenert
Affiliation:
Mercator Research Institute on Global Commons and Climate Change, Technical University of Berlin, and Potsdam Institute for Climate Impact Research
Linus Mattauch
Affiliation:
Mercator Research Institute on Global Commons and Climate Change
Ottmar Edenhofer
Affiliation:
Mercator Research Institute on Global Commons and Climate Change, Potsdam Institute for Climate Impact Research, and Technical University of Berlin
Kai Lessmann
Affiliation:
Potsdam Institute for Climate Impact Research and Mercator Research Institute on Global Commons and Climate Change
Corresponding
E-mail address:
klenert@pik-potsdam.de
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Abstract

We study the impacts of investment in public capital on equity and efficiency. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. We find that in the long run, public investment is Pareto-improving and that it reduces inequality in wealth, welfare, and income at the same time, if it is financed by a capital tax. Consumption tax financing is also Pareto-improving but distribution-neutral. Only for labor tax financing, a trade-off between equity and efficiency occurs. Additionally, we find that agents differ in their preferred tax rates.The results for capital and labor tax financing are valid for both, the case of decreasing and constant returns to accumulable factors.

Keywords

Distribution Heterogeneous Saving Infrastructure Public Capital
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 4 , June 2018 , pp. 864 - 895
Copyright
Copyright © Cambridge University Press 2016 

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Footnotes

We thank Max Franks, Beatriz Gaitan, Ulrike Kornek, Anselm Schultes and two anonymous reviewers for helpful comments. Furthermore, we thank the participants of the 2014 PET conference for insightful discussions.

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