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Comments on “Optimal Capital Taxation with Idiosyncratic Investment Risk”

Comments on “Optimal Capital Taxation with Idiosyncratic Investment Risk” By Vasia Panousi and Catarina Reis Haiping Zhang Singapore Management University 43. Konstanz Seminar 23 May 2012. Related Literature:. 1. Idiosyncratic income risk and incomplete markets. Labor income risk.

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Comments on “Optimal Capital Taxation with Idiosyncratic Investment Risk”

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  1. Comments on “Optimal Capital Taxation with Idiosyncratic Investment Risk” By Vasia Panousi and Catarina Reis Haiping Zhang Singapore Management University 43. Konstanz Seminar 23 May 2012

  2. Related Literature: 1. Idiosyncratic income risk and incomplete markets Labor income risk Aiyagari (1994), Hugget (1993, 1997), Krusell and Smith (1998) Capital income risk Angeletos and Calvet (2005.2006), Angeletos (2007), Buera and Shin (2007), Cagetti and De Nardi (2006), Meh and Quadrini (2006) Benhabib, Bisin, Zhu (2011, ECTA) 2. Uninsured income risk and optimal taxation Ramsey Approach (Insurance) Aiyagari (1995), Chamley (2001) Mirrlees Approach (insurance vs. Incentive) Golosov et. al (2003), Albanesi and Sleet (2006), Golosov et. al. (2010), Golosov et. al. (2011), Fahri and Werning (2010)

  3. Main Features: A continuous-time heterogeneous-agent model idiosyncratic capital income risk and no aggregate uncertainty 2. Homothetic preference and CRS production 3. Redefine the net wealth of household i from the lifetime perspective Risky asset:Riskiness: Mean rate of return: rt Risk-free asset:rate of return: Rt Financial wealth Human wealth

  4. Model Solution: 1. Sameulson-Merton optimal portfolio choice (Angeletos, 2007) Risky investment: Risk-free investment: Portfolio share:

  5. Model Solution: Complete markets: Deterministic at the aggregate and the individual levels Capital and bonds are perfect substitutes Deterministic at the aggregate level and stochastic at the individual level Incomplete markets: In the steady state Risk premium required Precautionary saving Angeletos and Panousi (2009)

  6. Impacts of Proportional Capital Income Tax Intertemporal wedge Insurance effect The general equilibrium effect: If markets cannot provide sufficient private risk-sharing, the government may step in to provide additional public risk sharing in the form of proportional capital income tax.

  7. Comments • How do macro aggregates and the welfare of an “average” household respond to capital income tax during the transitional process? • upon the policy announcement • the medium-run adjustment • the long-run level • The optimal implementation schedule • Endogenous incomplete markets • Strategic default on risk-free bond • Fundamental causes of limited risk sharing in the private markets • Interactions between public and private risk sharingCrowd-in or crowd-out private risk-sharing (Krueger, et. al. 2011)

  8. Conclusion Very elegantly written and intuitively inspiring Serves as a benchmark for further quantitative analysis Opens a door for the research on a variety of topics optimal taxation in the presence of cross-sector differences in uninsured risk“Plants in the most volatile sector are subject to at least three times as much uncertainty as plants in the least volatile.” – Castro, Clementi, and Lee (2011) Endogenous project adoptionwill the public Insurance encourage the adoption of the inherently riskier but more productive projects? The extensive margin of investment: entrepreneurial entry and exit

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