NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Taxation of Labor Income and the Demand For Risky Assets

Douglas W. Elmendorf, Miles S. Kimball

NBER Working Paper No. 3904
Issued in November 1991
NBER Program(s):   AP   PE

The effect of uninsured labor income risk on the joint saving/portfolio composition decision is analyzed using new techniques from the theory of multiple risk-bearing. Applying this analysis, the effect of labor income taxes on the demand for risky securities is considered. It is well known that when private insurance markets are incomplete, the insurance afforded by labor income taxes can reduce overall saving. This paper establishes that - given plausible restrictions on preferences - the insurance afforded by labor income taxes increases the demand for risky securities, even when labor income is statistically independent of the returns to risky securities.

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Document Object Identifier (DOI): 10.3386/w3904

Published: Elmendorf, Douglas W. and Miles S. Kimball. "Taxation Of Labor Income And The Demand For Risky Assets," International Economic Review, 2000, v41(3,Aug), 801-832. citation courtesy of

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