Tax policies can boost insurance against individual shocks, improving market equilibrium.
The article explores how tax policies can act like insurance against personal financial setbacks in an uncertain economy. By using a simple model, the researchers show that taxes and subsidies can help individuals cope with unpredictable changes in wages and investment returns. These policies may lower employment and output, but they can improve overall well-being by providing protection against individual financial shocks. The study suggests specific tax strategies that could maximize welfare in this context.