Tuesday, April 13, 2010

On the implication of a representative agent in a model of taxation of the financial sector to fund future bailouts

It would be good if this were a real paper I had written, but its only a blog entry. In a representative agent model, the agent owns the profits of the financial (and perhaps other) sector, gets taxed and also receives lump-sum transfers.

My first thought was that the infinitely lived agent would be indifferent to receiving the profits and the lump-sum transfers. This assumes that the agent receives a portion of the taxes as transfers if there is no crisis (some of it is saved in case of future crisis). Unfortunately, it isn't as clear cut as this since taxation affects effort - which means that the profits of the financial sector would be lower under taxation. This means that the inputs and output of the financial sector need to be more clearly modeled instead of being dropped into a model in an ad hoc fashion.

I'll leave it to economists better adapt to modeling to come up with some deep insight (if there is any).

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