Adverse Selection In Credit Markets and Regressive Profit Taxation
AbstractIn many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.
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Date of creation: Sep 2012
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Other versions of this item:
- Scheuer, Florian, 2013. "Adverse selection in credit markets and regressive profit taxation," Journal of Economic Theory, Elsevier, vol. 148(4), pages 1333-1360.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-30 (All new papers)
- NEP-CTA-2012-09-30 (Contract Theory & Applications)
- NEP-PBE-2012-09-30 (Public Economics)
- NEP-PUB-2012-09-30 (Public Finance)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Why should entrepreneurial income be taxed less progressively than labor income?
by Economic Logician in Economic Logic on 2012-10-15 14:06:00
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