François Courtoy*, Erika Pini**

phd seminar

François Courtoy*, Erika Pini**

Université Catholique de Louvain
Optimal taxes and transfers with household heterogeneity*
Polarization in a multidimensional political space**
Joint with
Boris Chafwehé*
Tuesday, June 15 2021| 11:00am to 12:30pm

Anushka Chawla: anushka.chawla[at]
Kenza Elass: kenza.elass[at]
Carolina Ulloa Suarez: carolina.ulloa-suarez[at]


*We investigate the properties of optimal fiscal policy in a framework where household heterogeneity is  accounted for. The Ramsey planner chooses (distortionary) labor taxes and transfers to maximize aggregate welfare in a two-agent economy.  We contrast the properties of optimal labor taxes in our model to the ones obtained in the representative agent counterpart. We first show that the presence of household heterogeneity introduces an additional source of fluctuations in the optimal tax rate, as varying taxes allows the planner to use transfers for redistributive purposes. We then show that, depending on the assumptions that are made on how transfer receipts are distributed among households, and the type of shocks hitting the economy, the structure of government bond markets becomes more or less important in shaping the dynamics of the Ramsey allocation. In some cases, the presence of transfers brings the incomplete markets allocation close to the one in which the planner has access to state-contingent claims. We finally show that the presence of heterogeneity and optimal transfers  helps bring the behaviour of fiscal variables in the Ramsey model closer to their counterpart in US data.

**In this paper, we study how candidates’ polarization on economic issues is affected by the existence of a second dimension along which voters are divided. Indeed, during the last decades, conflicts on cultural and social issues, such as civil rights, LGBTQ rights, and immigration, have risen, adding a new dimension to the political debate. This has transformed the traditional and unidimensional left-right divide on economic issues into a multidimensional political competition. We argue that when voters are divided in terms of their cultural and social values, political candidates can strategically use this second dimension to influence voters’ support for the economic policy they propose. We show that, even if voters’ preferences along the two dimensions are independent, candidates’ positions are not: the position adopted on the values dimension affects voters’ support for any given economic policy, thus determining the cost and benefit of polarization on this dimension. Candidates tend to adopt more ambiguous positions on social values when the population is more divided over them, which allows them to polarize more on the economic policies. Finally, if voters' preferences on the two dimensions are correlated, candidates tend to take stronger stands on both issues, and their platforms diverge on both economic policies and their value content.

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