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A Danish CGE model including uninsurable idiosyncratic earnings uncertainty

A Danish CGE model including uninsurable idiosyncratic earnings uncertainty. The transition. Building blocks of the model. Same basic structure as “the small model” Benchmark: A.K. OLG model with certainty Forward solution Government sector Endogenous labor supply. The model.

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A Danish CGE model including uninsurable idiosyncratic earnings uncertainty

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  1. A Danish CGE model including uninsurable idiosyncratic earnings uncertainty The transition

  2. Building blocks of the model • Same basic structure as “the small model” • Benchmark: A.K. OLG model with certainty • Forward solution • Government sector • Endogenous labor supply

  3. The model • Satellite approach • 16 generations, (100 periods) • Danish progressive tax system • Simple Danish PAYG pension system • Backward solution: dynamic programming • Uninsurable idiosyncratic earnings uncertainty - Markov transition probabilities - Progressive taxes act as insurance device

  4. Previous findings • A.K. : progressive taxes are bad • TWP : include idiosyncratic earnings uncertainty Compares two steady states: welfare increases when moving from a proportional to a progressive tax system

  5. Critique • A.K. : certainty, agents have perfect foresight - the benchmark model • TWP: there may be welfare loss in the transition - very time demanding

  6. Goal • A simpler model + a faster computer • (+ a faster program?) • Evaluate welfare change in transition • LSRA

  7. Future agenda • Endogenous Markov transition probabilities and wage bargaining process • Endogenous unemployment probabilities and optimal insurance system • An optimal public sector (taxes, pensions) • Stochastic health shocks and optimal insurance system

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