The Taxation Of Capital Returns In Overlapping Generations Economies Without Financial Assets

The author shows in this paper that in an overlapping generations economy with production à la Diamond (1970) in which the agents can only save in terms of capital (i.e. with no asset bubbles à la Tirole (1985) or public debt as in Diamond (1965)), there is a period-by-period balanced fiscal policy supporting a steady state allocation that Pareto-improves upon the laissez-faire competitive equilibrium steady state (without having to resort to intergenerational transfers) if there is no first generation or the economy starts there. A transition from the competitive equilibrium steady state to this other allocation is also Pareto-improving if the former is dynamically inefficient, but even in the dynamically efficient case if the elasticity of output to capital is high enough.