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Signing distortions in optimal tax or other adverse selection models with random participation

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  • Laurence Jacquet
  • Etienne lehmann
  • Bruno Van Der Linden

    ()
    (THEMA, Universite de Cergy-Pontoise
    CREST
    IRES - Université Catholique de Louvain and FNRS)

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 e ort is distorted downwards. Numerical simulations for the U.S. con rm 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 THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2012-27.

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Date of creation: 2012
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Handle: RePEc:ema:worpap:2012-27

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Keywords: Adverse selection; Optimal taxation; Random participation.;

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References

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