Endogenous Factor Income Distribution: Piketty meets Romer

in Economic Inquiry (2020), 58

What is the relationship between the economy’s long-run growth rate, its capital-income ratio, and its factor income distribution? We argue that a satisfactory answer must be derived in an analytical ... [more ▼]

What is the relationship between the economy’s long-run growth rate, its capital-income ratio, and its factor income distribution? We argue that a satisfactory answer must be derived in an analytical framework that treats the growth and the savings rate as endogenous. From this perspective we scrutinize Piketty’s (2014) theory put forth in his book Capital in the Twenty-First Century in a richly parameterized variant of Romer’s (1990) seminal model with and without population growth. The economy’s growth and its savings rate are exogenous in Piketty’s theory and endogenous in Romer’s. We find that a smaller long-run growth rate may be associated with a smaller capital-income ratio. Hence, the key implication of Piketty’s Second Fundamental Law of Capitalism does not hold. Moreover, in contrast to Piketty’s theory, a smaller long-run growth rate may go together with a greater or a smaller capital share. [less ▲]

ON THE DESIRABILITY OF TAX COORDINATION WHEN COUNTRIES COMPETE IN TAXES AND INFRASTRUCTURE

in Economic Inquiry (2017)

The paper contains two distinct messages. First, when jurisdictions compete in two independent strategic variables, the decision to coordinate on one variable (a tax rate) induces a carry-over effect on ... [more ▼]

The paper contains two distinct messages. First, when jurisdictions compete in two independent strategic variables, the decision to coordinate on one variable (a tax rate) induces a carry-over effect on the unconstrained instrument (infrastructure expenditures). Consequently, classical results of the tax coordination literature may be qualified. A second message is that the relative flexibility of the strategic instruments, which may depend on the time horizon of the decision-making, does matter. In particular, tax coordination is more likely to be detrimental (in terms of revenue and/or welfare) when countries can compete simultaneously in taxes and infrastructure, rather than sequentially. The reason is that simultaneity eliminates strategic effects between tax and non-tax instruments. [less ▲]