1 Consider a representative infinitely lived agent maximization problem max Blog ( C ) + olog ( 1 - H ) ] ( Cr.H.K + 10 subject to the budget constraint and physical capital law of motion , respectively : ( 1+ Tc ) C = W , H , + R , K , + Te - I K = ( 1-6 ) K , + I , where K , is the physical capital stock ; C , consumption ; I , investment ; H , labor ; ( 1 - H ) : leisure ; o relative weight consumption - leisure ; 6 > 0 is the rate of depreciation of physical capital , R , is the capital rental rate , and W , is the real wage . A government imposes a consumption tax and rebate the tax revenue by giving identical lump sum transfers to the representative agent . Hence , the government budget constraint is ( TC ) C = T , where TC is the consumption tax rate and T , represents a lump sum transfers in period t .. A representative firm rents physical capital and hires workers on