Abstract
In this paper we extend the Hicksian compensating variation welfare measure in two directions. First, we adjust the size of the compensating variation in order to account for the fact that the compensating transfers will result in changes in output, as well as in prices, because labor and, in dynamic models, capital will adjust in response to these transfers. Second, we extend the measure to a dynamic setting with possibly time non-separable preferences. We find that these considerations become more significant for the welfare cost of higher labor income taxes as one moves from static to dynamic models, to models with time non-separable preferences, and finally to models with uncertainty.
Acknowledgments
We would like to thank the editor of this journal and one anonymous referee for very insightful comments, which have led to substantial improvements in the quality of this paper. Suggestions from Andrey Stoyanov are also acknowledged.
References
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Articles in the same Issue
- Frontmatter
- Advances
- A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes
- Labor Share Dynamics and Factor Complementarity
- Effect of Monetary Policy on Government Spending Multiplier
- News-Driven Housing Booms: Spain Versus Germany
- Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union
- Housing Taxation and Economic Growth: Analysis of a Balanced-Growth Model with Residential Capital
- Intergenerational Linkages, Uncertain Lifetime and Educational and Health Expenditures
- Contributions
- Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy
- Uncertainty Shocks, Innovation, and Productivity
- Asymmetric Effects of Private Debt on Income Growth
- Interpreting Structural Shocks and Assessing Their Historical Importance
- Charge-offs, Defaults and the Financial Accelerator
- Filtering Persistent and Asymmetric Cycles
- Population Aging and Convergence of Household Credit
- Robustly Optimal Monetary Policy in a Behavioral Environment
- Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions
- The Welfare Effects of Social Insurance Reform in the Presence of Intergenerational Transfers
Articles in the same Issue
- Frontmatter
- Advances
- A New General Equilibrium Welfare Measure, with Application to Labor Income Taxes
- Labor Share Dynamics and Factor Complementarity
- Effect of Monetary Policy on Government Spending Multiplier
- News-Driven Housing Booms: Spain Versus Germany
- Sovereign Debt Crisis, Fiscal Consolidation, and Active Central Bankers in a Monetary Union
- Housing Taxation and Economic Growth: Analysis of a Balanced-Growth Model with Residential Capital
- Intergenerational Linkages, Uncertain Lifetime and Educational and Health Expenditures
- Contributions
- Tolerance of Informality and Occupational Choices in a Large Informal Sector Economy
- Uncertainty Shocks, Innovation, and Productivity
- Asymmetric Effects of Private Debt on Income Growth
- Interpreting Structural Shocks and Assessing Their Historical Importance
- Charge-offs, Defaults and the Financial Accelerator
- Filtering Persistent and Asymmetric Cycles
- Population Aging and Convergence of Household Credit
- Robustly Optimal Monetary Policy in a Behavioral Environment
- Forward Guidance Effectiveness in a New Keynesian Model with Housing Frictions
- The Welfare Effects of Social Insurance Reform in the Presence of Intergenerational Transfers