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Infrastructure and inequality: Insights from incorporating key economic facts about household heterogeneity

Authors
/persons/resource/klenert.david

Klenert,  David
Potsdam Institute for Climate Impact Research;

Mattauch,  L.
External Organizations;

/persons/resource/Ottmar.Edenhofer

Edenhofer,  Ottmar
Potsdam Institute for Climate Impact Research;

Lessmann,  K.
External Organizations;

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Klenert, D., Mattauch, L., Edenhofer, O., Lessmann, K. (2018): Infrastructure and inequality: Insights from incorporating key economic facts about household heterogeneity. - Macroeconomic Dynamics, 22, 4, 864-895.
https://doi.org/10.1017/S1365100516000432


Cite as: https://publications.pik-potsdam.de/pubman/item/item_21039
Abstract
We study the impacts of investment in public capital on equity and efficiency. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. We find that in the long run, public investment is Pareto-improving and that it reduces inequality in wealth, welfare, and income at the same time, if it is financed by a capital tax. Consumption tax financing is also Pareto-improving but distribution-neutral. Only for labor tax financing, a trade-off between equity and efficiency occurs. Additionally, we find that agents differ in their preferred tax rates.The results for capital and labor tax financing are valid for both, the case of decreasing and constant returns to accumulable factors.