An Exploration of Incentive-Compatible ELIE
AbstractSimula and Trannoy (2007) have shown that ELIE is confronted with implementation issues when the policymaker cannot observe the time worked by every individual. This paper tries to fix this problem. To this aim, it characterizes the second-best allocations which are the closest to ELIE (i) in terms of welfare and (ii) in terms of transfers. In (i), we consider a welfarist setting in which the social weights are those required by ELIE to be generated as a first-best allocation. More precisely, these weights are defined by the tangent hyperplane to the first-best Pareto set at the ELIE allocation. We show that, in the absence of income effect on labour supply, the closest solution to ELIE is the laissez-faire. Moreover, simulations for a Cobb-Douglas economy show that the second-best transfers may then be substantially different from ELIE. This is why, in (ii), we construct second-best allocations which are both incentive-compatible and for which the income tax schedule generates net transfers which coincide with the first-best ELIE transfers. We show that there is a unique solution which is Pareto-efficient.
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Bibliographic InfoPaper provided by Institut d'economie publique (IDEP), Marseille, France in its series IDEP Working Papers with number 0812.
Length: 26 pages
Date of creation: 14 Dec 2008
Date of revision: 14 Dec 2008
Redistribution; Incentive Compatibility; Optimal Income Taxation.;
Find related papers by JEL classification:
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
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- Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
- Alain Trannoy & Laurent Simula, 2008. "When Kolm Meets Mirrless: ELIE," IDEP Working Papers 0811, Institut d'economie publique (IDEP), Marseille, France, revised Aug 2008.
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- Jean-Sébastien Gharbi & Yves Meinard, 2012. "Sur le sens du non welfarisme dans le modèle ELIE de redistribution des revenus de Kolm," AMSE Working Papers 1237, Aix-Marseille School of Economics, Marseille, France.
- Jean-Sébastien Gharbi & Yves Meinard, 2012. "Sur le Sens du Non Welfarisme dans le Modèle ELIE de Redistribution des Revenus de Kolm," Working Papers halshs-00793658, HAL.
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