While Section 2.1 compared the most e¢ cient equilibrium under common ownership with the benchmark, Proposition 7 considers all equilibria under common ownership. Proposition 7 (Comparison of equilibria, exit): Suppose L=n v (1 F ()). There is 2 [0; 1) s.t., if , any equilibrium under common ownership is strictly more e¢ cient than any equilibrium under separate ownership. Proof of Proposition 7. Suppose L=n v (1 F ()). From Lemma 3, the unique working threshold in any equilibrium under separate ownership is strictly smaller thanthat is, c so;exit <. Moreover, since c so;exit solves exit (F (c)) = c , lim !1 c so;exit = (1 !). From Lemma 4, a type (i) equilibrium under common ownership exists in which the working threshold is. From the proof of Lemma 4, the only other possible equilibrium is a type (i) equilibrium in which the investor retains bad …rms if = 0. If such an equilibrium exists, the working threshold must satisfy exit (F (c)) = c. Note that, as ! 1, any solution of exit (F (c)) = c converges to. Therefore, if is su¢ ciently close to 1, any equilibrium under common ownership is strictly more e¢ cient than any equilibrium under separate ownership.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu States. An aspect of the EITC that has received little attention thus far is its role as a public insurance program. Yet, the structure of the EITC necessarily protects its primary class of recipients, unskilled single mothers, against major risks they face to both wages and changes in family structure. Our study provides the first quantitative statement about the insurance provided by the EITC. We study a dynamic model of consumption, savings, and labor supply in which households face wage and demographic risk, but have only limited selfinsurance capacity. We use the model to compare outcomes under the EITC to the counterfactual in which it is completely eliminated. We find that the EITC provides substantial insurance to unskilled single mothers: The program reduces consumption volatility, as measured by the coefficient of the variation, by 12 percentage points or more, even as it allows these households to save less. Importantly, this insurance provision may not be compromising incentives to work: The model suggests that the EITC increases the labor supply of unskilled single mothers substantially at the extensive margin. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S NON-TECHNICAL SUMMARYIn this paper, we evaluate the Earned Income Tax Credit (EITC), which is the largest antipoverty program in the United States to date. The EITC is a fully refundable income tax credit. For low-income households who qualify, the EITC frequently constitutes a significant portion of after-tax wage income. The largest population of EITC recipients is single mothers, which is the focus of our study.We find that the EITC effectively insures single mothers against volatility in wage income and the risk of needing to care for dependents. That is, the model suggests the EITC may be substantially improving the ability of young unskilled mothers to withstand shocks and smooth consumption over the course of their lives. In fact, our results suggest that the program reduces consumption volatility by 12 percentage points or more. The EITC does this while allowing households to save less and consume more.Our model also addresses the labor supply effects of the EITC, and finds that it encourages labor force participation among single mothers but reduces hours worked. Given that the EITC compresses earnings volatility while simultaneously increasing labor force participation and mean earnings, our conclusion is that the EITC is insurance largely w...
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