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Moral Hazard and Optimal Commodity Taxation

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Author Info
Richard J. Arnott
Joseph E. Stiglitz

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Abstract

The central result of this paper is that when moral hazard ispresent,competitive equilibrium is almost always (constrained) inefficient. Moral hazard causes shadow prices to deviate from market prices. To remedy this market failure, the government could introduce differential commodity taxation. Moral hazard causes people to take too little care to prevent accidents. The corresponding dead-weight loss can be reduced by subsidizing (taxing) those goods the consumption of which encourages (discourages) accident avoidance.At the (constrained) optimum, the sum of the deadweight losses as-sociated with moral hazard, on the one hand, and differential commodity taxation, on the other, is minimized.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1154.

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Date of creation: Aug 1986
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Handle: RePEc:nbr:nberwo:1154

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  3. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Annette Hofmann, 2007. "Internalizing externalities of loss prevention through insurance monopoly: an analysis of interdependent risks," The Geneva Papers on Risk and Insurance Theory, Springer, vol. 32(1), pages 91-111, June. [Downloadable!] (restricted)
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  9. Schjelderup, Guttorm, 1990. "Reforming state enterprises in socialist economies : guidelines for leasing them to entrepreneurs," Policy Research Working Paper Series 368, The World Bank. [Downloadable!]
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  11. Robin Boadway & Nicolas Marceau, 1994. "Time inconsistency as a rationale for public unemployment insurance," International Tax and Public Finance, Springer, vol. 1(2), pages 107-126, October. [Downloadable!] (restricted)
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  13. Konrad, Kai A, 1999. "Privacy, Time Consistent Optimal Labour Income Taxation and Education Policy," CEPR Discussion Papers 2326, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  14. Gerard Russo, 1989. "Moral Hazard and Optimal Cigarette Taxation," Working Papers 198918, University of Hawaii at Manoa, Department of Economics. [Downloadable!]
  15. Louis Kaplow, 1993. "Government Relief for Risk Associated with Government Action," NBER Working Papers 3006, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Joseph E. Stiglitz, 1986. "Economics of Information and the Theory of Economic Development," NBER Working Papers 1566, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Robin Boadway & Manuel Leite-Monteiro & Maurice Marchand & Pierre Pestieau, 2002. "Social Insurance and Redistribution," Working Papers 1004, Queen's University, Department of Economics. [Downloadable!]
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