AN EQUILIBRIUM-ANALYSIS OF FISCAL-POLICY WITH UNCERTAINTY AND INCOMPLETE MARKETS

Insurance aspects of tax policies are studied in a simple intertempora l general equilibrium model in which agents are uncertain about both t he future wage rates and the rate of return on capital. Taxation and l ump-sum subsidy policies generally reduce employment, output and the c apital stock, but nonetheless they can be structured to provide Pareto improvements on the incomplete market equilibrium. These policies pro vide insurance against individual shocks, not aggregate shocks. Exampl es of welfare maximizing tax schemes are provided using a simple compu table general equilibrium model.