Abstract
Abstract This paper introduces private saving and public debt into the shirking-unemployment model of Shapiro and Stiglitz (1984) , while relaxing their exclusive focus on steady states. After generalizing their no-shirking constraint to accommodate asset accumulation, and demonstrating that the resulting economy’s equilibrium is saddle-path stable, we use our dynamic model to obtain significant departures from the Shapiro–Stiglitz prescriptions for optimal policy. Most notably, wage income should be taxed (not subsidized) in the long run if the labor market is sufficiently distorted. Furthermore, interest income should be (exhaustively) taxed only during an initial interval of time, as in Chamley’s (1986) full-employment model.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
