Adverse selection in credit markets and regressive profit taxation
In 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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nachman, David C & Noe, Thomas H, 1994. "Optimal Design of Securities under Asymmetric Information," Review of Financial Studies, Society for Financial Studies, vol. 7(1), pages 1-44.
- Jean-Charles Rochet & Philippe Chone, 1998. "Ironing, Sweeping, and Multidimensional Screening," Econometrica, Econometric Society, vol. 66(4), pages 783-826, July.
- Gordon, Roger H., 2010. "Taxation And Corporate Use Of Debt: Implications For Tax Policy," National Tax Journal, National Tax Association, vol. 63(1), pages 151-74, March.
- Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October.
- David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 281-292.
- Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2009.
"The Optimal Income Taxation of Couples,"
Econometric Society, vol. 77(2), pages 537-560, 03.
- Kleven, Henrik & Kreiner, Claus Thustrup & Saez, Emmanuel, 2006. "The Optimal Income Taxation of Couples," CEPR Discussion Papers 5978, C.E.P.R. Discussion Papers.
- Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2006. "The Optimal Income Taxation of Couples," NBER Working Papers 12685, National Bureau of Economic Research, Inc.
- Jean-Charles Rochet & Lars A. Stole, 2002. "Nonlinear Pricing with Random Participation," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 277-311.
- Florian Scheuer, 2014.
"Entrepreneurial Taxation with Endogenous Entry,"
American Economic Journal: Economic Policy,
American Economic Association, vol. 6(2), pages 126-63, May.
- Parker, Simon C., 1999.
"The optimal linear taxation of employment and self-employment incomes,"
Journal of Public Economics,
Elsevier, vol. 73(1), pages 107-123, July.
- Simon Parker, . "The Optimal Linear Taxation of Employment and Self-Employment Incomes," Economics and Finance Discussion Papers 98-05, Economics and Finance Section, School of Social Sciences, Brunel University.
- Casey Rothschild & Florian Scheuer, 2013.
"Redistributive Taxation in the Roy Model,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 128(2), pages 623-668.
- Casey Rothschild & Florian Scheuer, 2011.
"Optimal Taxation with Rent-Seeking,"
NBER Working Papers
17035, National Bureau of Economic Research, Inc.
- Smart, Michael, 2000.
"Competitive Insurance Markets with Two Unobservables,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 153-69, February.
- Michael Smart, 1996. "Competitive Insurance Markets with Two Unobservables," Working Papers msmart-96-01, University of Toronto, Department of Economics.
- Innes, Robert, 1993. "Financial Contracting under Risk Neutrality, Limited Liability and Ex ante Asymmetric Information," Economica, London School of Economics and Political Science, vol. 60(237), pages 27-40, February.
- Jullien, Bruno, 1997.
"Participation Constraints in Adverse Selection Models,"
IDEI Working Papers
67, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jullien, Bruno, 2000. "Participation Constraints in Adverse Selection Models," Journal of Economic Theory, Elsevier, vol. 93(1), pages 1-47, July.
- Mariacristina De Nardi & Phil Doctor & Spencer D. Krane, 2007. "Evidence on entrepreneurs in the United States: data from the 1989–2004 survey of consumer finances," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 18-36.
- Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 1991. "Optimal linear income taxation in models with occupational choice," Journal of Public Economics, Elsevier, vol. 46(2), pages 133-162, November.
- J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
- Philippe Chone & Guy Laroque, 2010.
"Negative Marginal Tax Rates and Heterogeneity,"
American Economic Review,
American Economic Association, vol. 100(5), pages 2532-47, December.
- Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June.
- Nick Netzer & Florian Scheuer, 2009.
"Competitive Screening in Insurance Markets with Endogenous Wealth Heterogeneity,"
SOI - Working Papers
0907, Socioeconomic Institute - University of Zurich, revised Jun 2009.
- Nick Netzer & Florian Scheuer, 2010. "Competitive screening in insurance markets with endogenous wealth heterogeneity," Economic Theory, Springer, vol. 44(2), pages 187-211, August.
- Ghatak, Maitreesh & Morelli, Massimo & Sjostrom, Tomas, 2007. "Entrepreneurial talent, occupational choice, and trickle up policies," Journal of Economic Theory, Elsevier, vol. 137(1), pages 27-48, November.
- Hellmann, Thomas & Stiglitz, Joseph, 2000. "Credit and equity rationing in markets with adverse selection," European Economic Review, Elsevier, vol. 44(2), pages 281-304, February.
- Parker, Simon C, 1997. "The Distribution of Self-Employment Income in the United Kingdom, 1976-1991," Economic Journal, Royal Economic Society, vol. 107(441), pages 455-66, March.
- Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
- Simon C. Parker, 2003. "Asymmetric information, occupational choice and government policy," Economic Journal, Royal Economic Society, vol. 113(490), pages 861-882, October.
When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:148:y:2013:i:4:p:1333-1360. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.