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Signing Distortions in Optimal Tax and other Adverse Selection Problems with Random Participation

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  • Laurence Jacquet
  • Etienne Lehmann
  • Bruno Van der Linden

Abstract

We develop a methodology to sign output distortions in the random participation framework. We apply our method to monopoly nonlinear pricing problem, to the regulatory monopoly problem and mainly to the optimal income tax problem. In the latter framework, individuals are heterogeneous across two unobserved dimensions: their skill and their disutility of participation to the labor market. We derive a fairly mild condition for optimal marginal tax rates to be non negative everywhere, implying that in-work effort is distorted downwards. Numerical simulations for the U.S. confirm this property. Moreover, it is typically optimal to provide a distinct level of transfer to the non-employed and to workers with zero or negligible earnings.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3766.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_3766

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Keywords: adverse selection; optimal taxation; random participation;

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References

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  1. BOADWAY, R. & MARCHAND, M. & PESTIEAU, P. & del MAR RACIONERO, M., 2001. "Optimal redistribution with heterogeneous preferences for leisure," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2001025, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Philippe Chone & Guy Laroque, 2010. "Negative Marginal Tax Rates and Heterogeneity," American Economic Review, American Economic Association, American Economic Association, vol. 100(5), pages 2532-47, December.
  3. Philippe Chone & Guy Laroque, 2001. "Optimal Incentives for Labor Force Participation," Working Papers, Centre de Recherche en Economie et Statistique 2001-26, Centre de Recherche en Economie et Statistique.
  4. Boadway, Robin & Jacquet, Laurence, 2008. "Optimal marginal and average income taxation under maximin," Journal of Economic Theory, Elsevier, Elsevier, vol. 143(1), pages 425-441, November.
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  15. Kleven, Henrik Jacobsen & Kreiner, Claus Thustrup, 2006. "The marginal cost of public funds: Hours of work versus labor force participation," Journal of Public Economics, Elsevier, Elsevier, vol. 90(10-11), pages 1955-1973, November.
  16. Seade, J. K., 1977. "On the shape of optimal tax schedules," Journal of Public Economics, Elsevier, Elsevier, vol. 7(2), pages 203-235, April.
  17. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
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Cited by:
  1. Laurent Simula, 2013. "Tax Competition and Migration," 2013 Meeting Papers, Society for Economic Dynamics 1126, Society for Economic Dynamics.
  2. Normann Lorenz & Dominik Sachs, 2012. "Optimal Participation Taxes and Efficient Transfer Phase-Out," Working Paper Series of the Department of Economics, University of Konstanz, Department of Economics, University of Konstanz 2012-37, Department of Economics, University of Konstanz.

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