From Pigou to Extended Liability: On the Optimal Taxation of Externalities under Imperfect Financial Markets
AbstractPigovian taxation of externalities has limited appeal if the tortfeaser has insufficient resources to pay the damage when it occurs. To defend Pigovian taxation in the presence of judgement-proof agents, its proponents point at the many institutions extending liability to third parties. Yet little is known about the validity of Pigou's analysis in this context. The paper analyses the costs and benefits of extended liability and investigates whether full internalization is called for in the presence of agency costs between potential tortfeasers and providers of guarantees. Its contribution is two-fold. It first shows that the better the firms' corporate governance and the stronger their balance sheet, the more closely taxes should track the corresponding externality. It then develops the first analysis of extended liability when guarantors themselves may be judgement-proof, and the extension of liability may give rise to further externalities. Relatedly, it derives the curvature of the optimal taxation of externalities in a multi-plant firm. Copyright , Wiley-Blackwell.
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Bibliographic InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 503.
Date of creation: Sep 2008
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Publication status: Published in The Review of Economic Studies, vol.�77, n°2, avril 2010, p.�697-729.
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- Jean Tirole, 2010. "From Pigou to Extended Liability: On the Optimal Taxation of Externalities Under Imperfect Financial Markets," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 697-729.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-25 (All new papers)
- NEP-CTA-2008-03-25 (Contract Theory & Applications)
- NEP-MIC-2008-03-25 (Microeconomics)
- NEP-PUB-2008-03-25 (Public Finance)
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