Fiscal Policy with Heterogeneous Agents and Risky Home Production: The Case of South Africa
Date
2026
Authors
Yoseph Getachew
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
This paper develops and calibrates a heterogeneous-agent Aiyagari-type model tailored to a developing economy. The model incorporates stochastic home production, endogenous human capital investment, and incomplete capital markets. In contrast to standard incomplete-market models that typically predict excessive capital accumulation, the framework shows that when home and market goods are complements and home production is subject to idiosyncratic risk, households’ smooth consumption primarily through intertemporal time reallocation rather than intertemporal saving. As a result, labor and resources shift away from the market sector, leading to lower equilibrium capital accumulation. The model is calibrated to an emerging African economy and used to evaluate the macroeconomic and distributional effects of fiscal policy when households face shocks to both market productivity and home production. A five-percentage-point increase in the income tax rate reduces market capitalisation, output, and investment in human capital. The policy also lowers income and consumption inequality, but increases wealth inequality. These results highlight the importance of sectoral risk and household time allocation for evaluating fiscal policy in developing economies.