Motivated by distributional concerns raised by recent breakthroughs in AI and robotics, we ask how workers would prefer to manage an episode of automation in a task-based model, which distinguishes between automation and traditional technical progress. We show that under majority voting with the option to implement a “partial” UBI (as transfers to workers) it is optimal to tax capital at a higher rate than labor in the long run to fund the partial UBI. We show that, unlike traditional technical progress, automation always lowers the labor share in the long run, justifying distributional concerns. A quantitative analysis of an episode of automation for the US economy shows that it is optimal from the workers’ perspective to lower capital taxes and transfers over the transition. Nevertheless, this policy increases worker welfare by only 0.7% in consumption-equivalent terms, compared with a 21.6% welfare gain to entrepreneurs, because the welfare gains to workers from lower capital taxes are second-order, while the gains to entrepreneurs are first-order.

This paper augments the DMP model with large firms and intrafirm wage bargaining by an endogenous decision to become an entrepreneur that is based on heterogeneous entrepreneurial abilities. If workers’ wage bargaining power is not too large and the match efficiency is not too low, the decentralized market equilibrium features an inefficiently high number of entrepreneurs, because they appropriate large parts of the surplus from matches. A realistic calibration with empirically plausible parameters shows this case to be the relevant one. Consequently, introducing a tax on the profits of entrepreneurs restores the constrained first-best allocation by affecting occupational choices. It drives rather unproductive entrepreneurs out of the market since the marginal entrepreneur is affected and not the average one. Thus, the negative effects on job creation are small.

This paper studies the implications of distortions in intertemporal margins for the conduct of climate policy. We do so by introducing a framework that combines a standard two-period overlapping generations (OLG) model with a tractable model of household heterogeneity, in which over-accumulation of capital arises from uninsurable idiosyncratic labor income risk. We illustrate that market-based climate policies must be adjusted when the government cannot provide full insurance to households by taxing only capital and is constrained to transfer resources across generations for risk-sharing. In a numerical exercise, we find that idiosyncratic risk leads to an optimal capital income tax rate of 35 per cent and a carbon price 7.5 per cent lower than its first best.

This paper considers a model of linear capital taxation for an economy where capital and labor income are subject to idiosyncratic uninsurable risk. To keep the model tractable, we assume that investment decisions are made before uncertainty is realized, so that the realization of the capital and labor income shocks only affects current consumption. In this setting, we are able to jointly analyze capital and labor income risk and derive analytical results regarding the optimal taxation of capital. We find that the optimal capital tax is positive in the long run if there is only capital income risk. The reason for this is that the capital tax provides insurance against capital income risk. Furthermore, for high levels of risk, increasing the capital tax may actually induce capital accumulation. On the other hand, if there is only labor income risk, the optimal capital tax is zero. The sign of the optimal tax can only be negative if the two types of risk are negatively correlated and labor income risk is large enough.

This paper extends the Chamley–Judd framework by introducing preference externalities in a neoclassical growth model, and finds that the optimal capital tax increases with the extent of social-status seeking or negative leisure externalities. Furthermore, this paper finds that differences in leisure externalities lead to a distinct impact on optimal factor income taxes, and hence may serve as a plausible vehicle to explain the empirical differences in factor income taxation in the United States and Europe.

This paper analyzes optimal capital and labor income taxation for households differentiated by labor skill, income, and wealth, under a balanced government budget, over the business cycle. A model incorporating capital–skill complementarity in production and differential access to labor and capital markets is developed to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We find that optimal taxes for middle-income households are more volatile than the remaining taxes. Moreover, the government re-allocates the total tax burden in bad times so that the share of total tax revenue paid by middle-income households rises. This share also rises for low-income households but by significantly less, whereas the tax share for skilled households falls.

This paper compares the stochastic behavior of fiscal variables under optimal fiscal policy for the cases of full commitment by the government (Ramsey problem) and no commitment by the government (focusing on differentiable Markov perfect equilibrium). It shows that the cyclical properties of fiscal variables are similar for both commitment assumptions. These conclusions are robust to two different specifications of the structure of public bonds (risk-free and state-contingent) and to different sets of the parameters. The cyclical properties of fiscal variables, regardless of commitment assumptions, can be determined by the parameters of the utility function.

We study optimal taxation when jobs are found through a social network. The network determines employment, which workers may influence by engaging in social activities. The network parameters play an important role in determining the economy's employment level and the optimal income tax. The optimal labor income tax depends on both the traditional intensive margin of labor supply and a new extensive margin that depends on the structure of the social network. Social activities that promote social connections are instrumental to acquiring job information; taxation thus discourages both social activities and labor supply, reducing employment. Labor taxes vary positively with labor supply and negatively with employment. When networking is absent, taxes are higher and the economy's employment rate is lower. The optimal capital tax rate is zero, independent of labor market frictions. Social networking reduces job search frictions and is welfare-enhancing.

This paper considers a Ramsey model of linear taxation for an economy with capital and two kinds of labor. If the government cannot distinguish between the return from capital and the return from entrepreneurial labor, then there will be positive capital income taxation, even in the long run. This happens because the only way to tax entrepreneurial labor is by also taxing capital. Furthermore, under fairly general conditions, the optimal tax on observable labor income is higher than the capital tax, although both are strictly positive. Thus, even though both income taxes are positive, imposing uniform income taxation would lead to additional distortions in the economy.

This paper investigates the impact of the desire to keep up with the Joneses (KUJ) on economic growth and optimal tax policy in a continuous-time, overlapping-generations model with AK technology and exogenous, gradual retirement. Due to the desire to KUJ, the propensity to consume out of total wealth rises (declines), and the balanced growth rate declines (increases), when the households' individual total (physical and human) wealth is increasing (decreasing) with age. The rate of retirement determines whether or not a household's total wealth is increasing with age. If total wealth is increasing (decreasing) with age, an optimal allocation is decentralized by an intergenerationally progressive (regressive) lump-sum tax system. The desire to KUJ strengthens the intergenerational regressivity (progressivity) of the optimal tax system. The optimal tax implications of the desire to KUJ are a key finding of this paper.

Roger Guesnerie is a prominent economic theorist. Among his many honors and distinctions, he is a Foreign Member of the American Academy of Arts and Science and an Honorary Foreign Member of the American Economic Association; he has been a President of the European Economic Association and of the Econometric Society. Currently a Professor at the College de France, he has made fundamental contributions to second-best theory and public economics, information economics, and rational expectation theory.

Guesnerie was one of the founding fathers of second-best theory. His contributions to public economics, addressing issues such as nonconvex economies and especially taxation in a second-best context, remain absolute references on these topics; more recently, he has provided an in-depth analysis of issues related to climate change and global warming from a public economics perspective. Regarding contract theory, his work with Jean Jacques Laffont has considerably extended our understanding of the properties of the basic models, as well as the set of tools that economists can use to address these problems. Finally, Guesnerie's work has been influential in the critical reassessment of rational expectation theory that took place over the last decades. On one hand, he has been a prominent figure in the development of so-called “sunspot” models, which reconcile the Keynesian notion of “animal spirits” with the formal requirements of rational expectations. On the other hand, he has provided path-breaking discussions of the theoretical relevance of rational expectation theory, based on a detailed assessment of the coordination between individual expectations that is implicit in the concept. In some classes of models, Guesnerie argues, rational expectation equilibria constitute a natural outcome, because coordination can be achieved either through “eductive” reasoning (for which common knowledge of individual rationality is sufficient) or as the product of simple evolutionary or learning dynamics (and in general in both ways). In other cases, however, such arguments do not appear to support the rational expectations solution, and its relevance is therefore much less obvious. On a more institutional side, Guesnerie has created the doctoral program “Analyse et Politique Economique” at the Ecole des Hautes Etudes en Sciences Sociales; besides this program, in 1989, several related research centers in Paris merged into Delta, which Guesnerie chaired between 1992 and 2000, and then into the Paris School of Economics (PSE), at which Guesnerie is Chairman of the Board.

This interview with Roger Guesnerie gives an opportunity to discuss further the current situation of economic theory and economics in general, as well as to compare the European and American traditions in economics.

The Ramsey optimal taxation theory implies that the tax rate on capital income should be zero in the long run. This result holds even if the social planner only cares about workers that do not hold assets, or if the planner only cares about any other group in the economy. This paper demonstrates that although all households agree that capital income taxation should be eliminated in the long run, they do not agree on how to eliminate these taxes. Wealthy households would prefer a reform that is funded by higher taxes on labor income, whereas households with little wealth would prefer a reform that is funded mostly by high taxes on initial wealth. Pareto-improving reforms typically exist, but the welfare gains of such reforms are modest.

We analyze optimal dynamic taxation when labor supply is indivisible. As in Hansen (1985) and Rogerson (1988), markets are complete, and an employment lottery determines who works. The consumer can buy insurance to diversify this income uncertainty. The optimal wage tax is generally positive except for some special cases when leisure is nonnormal and the government can use debt as a policy instrument in addition to its tax instruments. We derive a HARA class of preferences, for which we characterize the dynamic paths of the wage tax. The optimal paths of the labor tax differ between divisible- and indivisible-labor economies.

Bob Lucas is widely regarded as the most influential economist of the past 25–30 years, at least among those working in macro and monetary economics. His work provided the primary stimulus for a drastic overhaul and revitalization of that broad area, an overhaul that featured the ascendance of rational expectations, the emergence of a coherent equilibrium theory of cyclical fluctuations, and specification of the analytical ingredients necessary for the use of econometric models in policy design. These are the accomplishments for which he was awarded the 1995 Nobel Prize in Economic Sciences. In addition, he has made outstanding contributions on other topics—enough, arguably, for another prize. Among these are seminal writings on asset pricing, economic growth and development, exchange-rate determination, optimal fiscal and inflation policy, and tools for the analysis of dynamic recursive models.

Clearly, Bob Lucas is very much a University of Chicago product; he studied there both as an undergraduate and as a Ph.D. student and has been on the faculty since 1975. Also, he has served as chairman of the Chicago Department of Economics and two terms as an editor of the Journal of Political Economy. Nevertheless, I and several colleagues at Carnegie Mellon like to point out that Bob was a professor here in the Graduate School of Industrial Administration from 1963 until 1974, during which time he conducted and published the central portions of the work for which he was awarded the Nobel Prize. Consequently, I could not resist asking Bob a few questions about his GSIA years in the interview.

Many researchers in the economics profession have been impressed and inspired by Lucas's technical skills, but the clarity and elegance of his writing style also deserve mention, plus his choice of research topics. The latter is reflective of Bob's utter seriousness of purpose. Each of his projects attacks a problem that is simultaneously of genuine theoretical interest and also of considerable importance from the perspective of economic policy. There is nothing frivolous about Lucas's research, as he had occasion to remind me during our interview.

As is well known to those who have been around him, Bob Lucas is a person who never uses three words when one will suffice—but that one will usually be carefully chosen. This characteristic shows up in the interview below. As a departure from standard MD Interview practice, and with the Editor's permission, this interview was conducted at a distance—i.e., via mail and e-mail. It yielded a smaller number of pages than have previous interviews, but I think that readers will find them stimulating. The process of obtaining them was somewhat challenging but highly informative and thoroughly enjoyable for me.