Fiscal policy, elastic labor supply, and endogenous growth

Endogenizing labor supply leads to fundamental changes in the equilibrium s tructure of the AK growth model. The balanced growth equilibrium can be des cribed in terms of two tradeoff loci relating the equilibrium growth rate t o the fraction of time devoted to leisure. The implications of endogenous l abor supply for fiscal policy are analyzed. Three issues are addressed. Fir st, the effects of various distortionary tax changes and government expendi ture changes on the equilibrium growth-leisure (employment) tradeoff are an alyzed. Second, optimal fiscal policy is characterized. Finally, the formal analysis is supplemented by numerical results, focusing particularly on th e quantitative welfare implications. (C) 2000 Elsevier Science B.V. All rig hts reserved. JEL classification: E62; J22; O41.