We develop a model of education where individuals face educational risk. Successfully entering the skilled labor sector depends on individual effort in education and public resources, but educational risk still causes (income) inequality. We show that an optimal public policy consists of...

In this model of education, where individuals are exposed both to educational risk and to wage risk within the skilled sector, successful graduation depends both on individual effort to study and on public resources. We show that insuring the present risks is a dichotomic task: Wage risk is...

In a model with ex-ante homogenous households, earnings risk and a general earnings function, we derive the optimal linear labor tax rate and optimal linear education subsidies. The optimal income tax trades off social insurance against incentives to work and to invest in human capital....

In a multi-country general equilibrium economy with mobile capital and rigid-wage unemployment, countries may differ in capital endowments, production technologies and rigid wages. Governments tax capital at the source to maximize national welfare. They account for tax base responses to their...

This paper analyzes optimal linear taxes on labor income and savings in a standard two-period life-cycle model with endogenous leisure demands in both periods and non-insurable income risks. Households are subject to skill shocks in both periods of the life-cycle. We allow for completely general...

To analyze the optimal social insurance package, we set up a two-period life-cycle model with risky human capital investment in which the government has access to labor taxation, education subsidies and capital taxation. Social insurance is provided by redistributive labor taxation. Moreover,...

Katz and Rapoport (2005) conclude that with linear production technology and the possibility of unilateral migration, region-specific shocks may increase the average level of education. Previously, Poutvaara (2000) derived a corresponding result with Cobb-Douglas technology and migration which...

While the effect of social security systems on retirement decisions has received much attention, the impact of these systems on individuals incentives to invest in their human capital has not been analyzed. We integrate human capital investment and retirement decisions in a simple analytical...

It has been argued that in the absence of altruism, intergenerational transfers can survive only if the old are net recipients. I prove that this need not hold in an over-lapping generations model with a fixed factor. For example, the middle-aged owning land may gain by providing public...

In earlier literature, the suggested Pareto improvements in pay-as-you-go (PAYG) systems have relied on the presence of externalities or the possibility of intragenerational redistribution. We show that neither assumption is necessary in an economy with intergenerational trade in a fixed factor...