A note on corporate taxation, limited liability, and asymmetric information
Becker and Fuest (forthcoming) provides a new explanation for the important and puzzling link between limited liability and corporate taxation. The authors argue that a corporate tax on all entrepreneurs with limited liability is optimal when entrepreneurs can offset potential losses and when asymmetric information exists regarding projects qualities. This note considers a model with slightly modified production technology. It confirms that entrepreneurs' abilities to offset losses and the existence of asymmetric information may affect government policy. However, it also shows that the optimal taxation policy differs from that in Becker and Fuest (forthcoming).
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- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Gale, William G., 1990.
"Federal lending and the market for credit,"
Journal of Public Economics,
Elsevier, vol. 42(2), pages 177-193, July.
- Johannes Becker & Clemens Fuest, 2007. "Why is there Corporate Taxation? The Role of Limited Liability Revisited," Journal of Economics, Springer, vol. 92(1), pages 1-10, September.
- Bracoud, Frederique & Hillier, Brian, 2000. "Equity or Debt? Contracts in Markets with Asymmetric Information," Manchester School, University of Manchester, vol. 68(1), pages 1-23, January.
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