DTC-SBTC Model: Optimal policies, wage premium and credit rationing

In this paper: Financial frictions distort the direction of technical change, credit rationing plus wage premium jointly determines direction of innovation, credit policy is more powerful than subsidies alone.In skill premium vs skill ratio analysis there are multiple equilibria and the dominant stand here is that:Non-monotonic skill demand generates multiple steady states. Multiple equilibria with wage premium and financial frictions there are indeed multiple equilibria but not all of them are stable. And in the skill premium vs skill ratio analysis there are more stable equilibria. Ramsey-Mirrlees-Pigou in DTC-SBTC model analysis showed that taxes (environmental and income) are decreasing skill premium while clean subsidies are increasing inequality. Effect of carbon taxes is ambiguous and optimal subsidy: higher carbon tax lowers optimal clean subsidy, higher financial frictions or worse credit conditions, lower optimal clean subsidy, effects of social preferences are ambiguous. If clean sector creates more jobs government may increase subsidies, if subsidies may benefit skilled workers or capital owners,government may reduce subsidies to limit inequality. Policy tools interact, taxes substitute subsidies, credit frictions weaken them, and inequality reshapes them.