Redistribution Spurs Growth by Using a Portfolio Effect on Risky Human Capital

ETH Risk Center – Working Paper No. 12-018

27 Pages Posted: 21 Dec 2012

See all articles by Jan Lorenz

Jan Lorenz

Jacobs University Bremen

Fabian Paetzel

University of the German Federal Armed Forces - Helmut Schmidt Universität; DFG Research Group 2104

Frank Schweitzer

ETH Zürich

Date Written: October 18, 2012

Abstract

We demonstrate by mathematical analysis and systematic computer simulations that redistribution can lead to sustainable growth in a society. In accordance with economic models of risky human capital, we assume that dynamics of human capital is modeled as a multiplicative stochastic process which, in the long run, leads to the destruction of individual human capital. When agents are linked by fully-redistributive taxation the situation might turn to individual growth in the long run. We consider that a government collects a proportion of income and reduces it by a fraction as costs for administration (efficiency losses). The remaining public good is equally redistributed to all agents. Sustainable growth is induced by redistribution despite the losses from the random growth process and despite administrative costs. Growth results from a portfolio effect. The findings are verified for three different tax schemes: proportional tax, taking proportional more from the rich, and proportionally more from the poor. We discuss which of these tax schemes performs better with respect to maximize growth under a fixed rate of administrative costs, and with respect to maximize the governmental income. This leads us to some general conclusions about governmental decisions, the relation to public good games with free-riding, and the function of taxation in a risk taking society.

Keywords: economic growth, taxation, human capital, wealth redistribution

Suggested Citation

Lorenz, Jan and Paetzel, Fabian and Schweitzer, Frank, Redistribution Spurs Growth by Using a Portfolio Effect on Risky Human Capital (October 18, 2012). ETH Risk Center – Working Paper No. 12-018. Available at SSRN: https://ssrn.com/abstract=2191570 or http://dx.doi.org/10.2139/ssrn.2191570

Jan Lorenz (Contact Author)

Jacobs University Bremen ( email )

Campus Ring 1
Bremen, 28759
Germany

Fabian Paetzel

University of the German Federal Armed Forces - Helmut Schmidt Universität ( email )

Holstenhofweg 85
Hamburg, 22008
Germany

DFG Research Group 2104 ( email )

Holstenhofweg 85
Hamburg, DE 22043
Germany

HOME PAGE: http://bedarfsgerechtigkeit.hsu-hh.de/en?set_language=en

Frank Schweitzer

ETH Zürich ( email )

Weinbergstrasse 56/58
WEV Room G 211
Zurich, CH-8032
Switzerland
+41 44 632 83 50 (Phone)

HOME PAGE: http://www.sg.ethz.ch

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