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

  • David Klenert (a1), Linus Mattauch (a2), Ottmar Edenhofer (a3) and Kai Lessmann (a4)

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.

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Corresponding author

Address correspondence to: David Klenert, Mercator Research Institute on Global Commons and Climate Change (MCC), Torgauer Str. 12-15, 10829 Berlin, Germany; e-mail: klenert@pik-potsdam.de.

Footnotes

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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.

Footnotes

References

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