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Optimal Tax-Subsidy Schemes in a Screening Model of the Labor Market with Information Externalities

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  • Coyte, Peter C

Abstract

This paper develops a screening model with a continuum of workers who differ in their productive capacity. Although this capacity is known by workers, it is only observed by employers if workers signal their productivity. A unique equilibrium exists in which signalers earn their marginal product, while others earn a wage commensurate with the average output of the pool of unscreened workers. Since signaling alters the wage earned by others, a divergence occurs between the private and the social return from signaling. This divergence is eliminated by designing a tax/subsidy scheme that maximizes two alternative measures of welfare.

Suggested Citation

  • Coyte, Peter C, 1990. "Optimal Tax-Subsidy Schemes in a Screening Model of the Labor Market with Information Externalities," Public Finance = Finances publiques, , vol. 45(1), pages 37-58.
    • Handle: RePEc:pfi:pubfin:v:45:y:1990:i:1:p:37-58
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