DP16479 Play for the Rich and Work for the Poor? The Optimal Distribution of Saving and Work in the Heterogeneous Agents Neoclassical Growth Model

Author(s): Akshay Shanker, Martin Wolf
Publication Date: August 2021
Keyword(s): constrained efficiency, endogenous labor supply, incomplete markets, Pecuniary externality
JEL(s): D31, D52, E21, E24, J22
Programme Areas: Labour Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16479

In an economy with un-insurable idiosyncratic labor income risk, how should saving and work hours be distributed across income and wealth? To answer this question, we study a planner who cannot complete asset markets, but dictates how much individuals must work and save. With a U.S. calibration, the planner raises total savings but not hours, driving up aggregate wages which re-distributes income toward the consumption-poor. Across the distribution, the productive (high wage earners) should save more; the wealthy should work more; the poor should keep their work hours unchanged and take advantage of the indirect transfers from higher wages.