Infrastructure and Inequality: Insights from Incorporating Key Economic Facts About Household Heterogeneity

30 Pages Posted: 7 Oct 2014

See all articles by David Klenert

David Klenert

Potsdam-Institut für Klimafolgenforschung (PIK)

Linus Mattauch

Mercator Research Institute on Global Commons and Climate Change (MCC)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Kai Lessmann

Potsdam Institute for Climate Impact Research (PIK)

Date Written: September 29, 2014

Abstract

We study the trade-off between equity and growth in the context of tax-financed investment in public capital. Taking into account stylized facts on wealth accumulation, we model agent heterogeneity through differences in saving behavior, income source and time preference. In contrast to the results of studies that introduce heterogeneity through different initial endowments only, we find that under our heterogeneity assumptions an equity-efficiency trade-off does not necessarily occur. We show that a consumption tax or a capital tax, levied to finance public capital, does not increase inequality. In our model capital tax-financed public investment has even an inequality-reducing effect -- thus allowing for Pareto-improving public investment that decreases inequality. Additionally we find that agents differ in their preferred tax rates. These results are valid for both, the case of endogenous growth and the case of steady state convergence and do not require the assumption of an identical rate of pure time preference across all households.

JEL Classification: E21, E60, H23, H31, H54

Suggested Citation

Klenert, David and Mattauch, Linus and Edenhofer, Ottmar and Lessmann, Kai, Infrastructure and Inequality: Insights from Incorporating Key Economic Facts About Household Heterogeneity (September 29, 2014). CESifo Working Paper Series No. 4972. Available at SSRN: https://ssrn.com/abstract=2506550

David Klenert (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Linus Mattauch

Mercator Research Institute on Global Commons and Climate Change (MCC) ( email )

Torgauer Straße 12-15
Berlin, 10829
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

Kai Lessmann

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

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