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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2001:9:
Welfare Effects of Controlling Labor Supply? An Application of the Stochastic Ramsey Model

Henrik Amilon () and Hans-Peter Bermin ()

Abstract: In this paper we extend Merton's (1975) classic stochastic version of the Ramsey model by allowing the government to control the expected growth rate of the labor supply. We characterize the solution to this control problem for general time-separable preferences, and derive an analytical solution for the CRRA case. The results show to what extent the planner, or government, increases consumption and welfare by taking an active role in controlling the economy. We also explore the implications of government control of labor growth for the term structure of interest rates and the effects of taxes on capital.

Keywords: Utility maximization; Ramsey model; stochastic control; interest rate dynamics; Malliavin calculus; (follow links to similar papers)

JEL-Codes: C68; D81; E21; E24; E43; E61; (follow links to similar papers)

34 pages, July 10, 2001, Revised March 11, 2002

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This paper is published as:
Amilon, Henrik and Hans-Peter Bermin, (2003), 'Welfare Effects of Controlling Labor Supply? An Application of the Stochastic Ramsey Model', Journal of Economic Dynamics and Control, Vol. 28, pages 331-348



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