2017-02: Equilibrium Comparative Statics in Finite Horizon Finance Economies with Stochastic Taxation

Abstract: 

This paper studies equilibrium comparative statics of Financial Markets (FM) equilibria in the finite horizon General Equilibrium with Incomplete Markets (GEI) model with respect to changes in stochastic tax rates imposed on agents’ endowments and dividends. We show that under reasonable assumptions, without assuming CRRA and identical agents, an increase in the current dividend tax rate unambiguously reduces current asset prices. The paper also finds that there exists a bound B such that for a coefficient of relative risk aversion less than B, an increase in a future dividend tax rate reduces current price of tradable assets. At the same time, for a coefficient of relative risk aversion greater than B, an increase in a future dividend tax rate boosts the current price of tradable assets. Finally, for a coefficient of relative risk aversion equal to B, an increase in a future dividend tax rate leaves current price of tradable assets unchanged. As a special case, under additional assumptions, B is equal to 1. Also, under reasonable assumptions, an increase in the current endowment tax rate reduces current asset prices, while an increase in a future endowment tax rate boosts current asset prices.

Publication date: 
April 21, 2017
Publication type: 
2017 Working Papers
Citation: 
Revised from the Center for Risk Management Research Working Paper 2016-03