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Screening with convex menus and optimal flow taxation

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  • Rothschild, Casey

Abstract

This paper considers a family of screening problems in which the principal is constrained to offer only convex menus. Applications include: (i) optimal flow taxation when individuals can substitute consumption and leisure inter-temporally; (ii) optimal product design for a linear-pricing monopolist; (iii) non-exclusive-cum-linearly-priced annuity markets. A modified version of a Myerson (1979)-Mirrlees (1971) direct mechanism—in which standard incentive compatibility constraints are replaced by “no-convexification” constraints—can be used to compute optimal allocations in this family of problems. In the flow taxation application, the optimal tax schedule necessarily features progressive marginal tax rates, typically features “distortions at the top,” and can be analyzed by adapting standard ironing techniques.

Suggested Citation

  • Rothschild, Casey, 2019. "Screening with convex menus and optimal flow taxation," Journal of Public Economics, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:pubeco:v:178:y:2019:i:c:s0047272719301136
    DOI: 10.1016/j.jpubeco.2019.104052
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    References listed on IDEAS

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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