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Signing distortions in optimal tax and other adverse selection problems with random participation

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Author Info

  • Laurence JACQUET

    ()
    (THEMA - University of Cergy-Pontoise, UCL-IRES, UCL-Hoover Chair and CESifo)

  • Etienne LEHMANN

    ()
    (CREST-INSEE, UCL-IRES, IDEP, IZA and CESifo)

  • Bruno VAN DER LINDEN

    ()
    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES), IZA and ERMES Université Paris 2)

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 Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2012003.

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Length: 31
Date of creation: 13 Mar 2012
Date of revision:
Handle: RePEc:ctl:louvir:2012003

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Keywords: Adverse selection; Optimal taxation; Random participation;

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Cited by:
  1. Laurent Simula, 2013. "Tax Competition and Migration," 2013 Meeting Papers 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 2012-37, Department of Economics, University of Konstanz.

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