Adverse selection in credit markets and regressive profit taxation
AbstractIn many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Theory.
Volume (Year): 148 (2013)
Issue (Month): 4 ()
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Web page: http://www.elsevier.com/locate/inca/622869
Multidimensional screening; Credit markets; Entrepreneurial taxation; Occupational choice;
Other versions of this item:
- Florian Scheuer, 2012. "Adverse Selection In Credit Markets and Regressive Profit Taxation," NBER Working Papers 18406, National Bureau of Economic Research, Inc.
- D5 - Microeconomics - - General Equilibrium and Disequilibrium
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- G1 - Financial Economics - - General Financial Markets
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
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by Economic Logician in Economic Logic on 2012-10-15 14:06:00
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