Universal basic income in a financial equilibrium

TL;DR

This paper proves the existence of an equilibrium in a model where universal basic income (UBI) redistributes income, affecting labor, financial markets, and welfare, with complex nonmonotonic effects on stock markets.

Contribution

It introduces a novel equilibrium existence proof for a UBI model using BSDEs, incorporating interconnected agent decisions and Nash perceptions.

Findings

UBI influences labor participation and welfare monotonically.

Stock market effects of UBI are complex and nonmonotonic.

The model provides insights into UBI's systemic impacts.

Abstract

Universal basic income (UBI) is a tax scheme that uniformly redistributes aggregate income amongst the entire population of an economy. We prove the existence of an equilibrium in a model that implements universal basic income. The economic agents choose the proportion of their time to work and earn wages that can be used towards consumption and investment in a financial market with a traded stock and annuity. A proportion of the earned wages is uniformly distributed amongst all agents, leading to interconnectedness of the agents' decision problems, which are already dependent on one another through the financial market. The decision problems are further entangled by Nash perceptions of labor; the agents respond to the labor choices of others and act upon their perceived income in their decision problems. The equilibrium is constructed and proven to exist using a backward stochastic differential equation (BSDE) approach for a BSDE system with a quadratic structure that decouples. We analyze the effects of a universal basic income policy on labor market participation, the stock market, and welfare. While universal basic income policies affect labor market participation and welfare monotonically, its effects on the stock market are nontrivial and nonmonotone.