ECN 741: Public Economics Fall 2008 max ∞ X t =0 β t W ( c 1 t ,c 2 t ,l 1 t ,l 2 t ,λ 1 ,λ 2 ) subject to c 1 t + c 2 t + k t +1 = F ( k t ,l 1 t ,l 2 t ) + (1-δ ) k t ; φ t where W i is deﬁned the obvious way. First order conditions imply W c it = βW c it +1 (1-δ + F kt +1 ) and in the steady state 1 = β (1-δ + F kt +1 ) and, therefore, tax on capital should be zero in the steady state. Capitalists vs Workers (Judd 1985) Suppose consumer of type 1 does not hold any asset and cannot save, borrow or invest. We call these ’Worker’. Also, assume that all the capital is held by consumer 2 who do not supply any labor. We call these ’Capitalists’. The implementability constraint for ’Worker’ is U 1 ct c 1 t + U
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