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Signaling and indirect taxation

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  • TRUYTS, Tom

    ()
    (Katholieke Universiteit Leuven, CES, B-3000 Leuven, Belgium; Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

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    Abstract

    Commodities communicate. Consumers choose a consumption bundle both for its intrinsic characteristics and for what this bundle communicates about their qualities (or 'identity') to spectators. We investigate optimal indirect taxation when consumption choices are motivated by two sorts of concerns: intrinsic consumption and costly signaling. Optimal indirect taxes are introduced into a monotonic signaling game with a finite typespace of consumers. We provide sufficient conditions for the uniqueness of the D1 sequential equilibrium in terms of strategies. In the case of pure costly signaling, signaling goods can in equilibrium be taxed without burden and the optimal quantity taxes on these goods are infinite. When commodities serve both intrinsic consumption and signaling, optimal taxes can be characterized by a generalization of the Ramsey rule, which also deals with the distortions resulting from signaling.

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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2010013.

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    Date of creation: 01 Apr 2010
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    Handle: RePEc:cor:louvco:2010013

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    Keywords: optimal taxation; indirect taxation; costly signaling; identity;

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