Increasing marginal tax rates and making payments to the poor reduce inequality and introduce savings dis-incentives. Using a heterogeneous agent model with incomplete markets, we show that higher taxes (and transfers) decrease consumption inequality but also mean savings and mean consumption....

Bankruptcy (defaulting on one's debts) acts as insurance if it allows default in cases of negative income shocks. However, if debts are not fully recoverable, lenders may instead react by limiting the amount that they allow households to borrow. This upper borrowing limit will increase as the...