Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2008/18:
Human Capital, Multiple Income Risk and Social Insurance
Dirk Schindler ()
Abstract: We set up an OLG-model, where households both choose human
capital investment and decide on investing their endogenous savings in a
portfolio of riskless and risky assets, exposing them to (aggregate) wage
and capital risks due to technological shocks. We derive the optimal public
policy mix of taxation and education policy. We show that risks can be
efficiently diversified between private and public consumption. This
results hinges on that the government can apply a wide set of instruments,
including differentiated wage and capital taxation. We also show that for
sufficient risk aversion the (Northern) European way of relying on
progressive wage taxation and granting education subsidies is an optimal
response to wage and capital risks.
Keywords: Optimal Income Taxation; Multiple Income Risks; Human Capital Investment; Portfolio Choice; (follow links to similar papers)
JEL-Codes: H21; I28; J24; (follow links to similar papers)
39 pages, September 22, 2008
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