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Optimal income taxation with Kalai wage bargaining and endogenous participation


  • Laurence Jacquet


  • Etienne Lehmann


  • Bruno Linden



This paper characterizes the optimal redistributive tax schedule in a search–matching framework where (voluntary) nonparticipation and (involuntary) unemployment are endogenous and wages are determined by proportional bargaining à la Kalai. The optimal employment tax rate is given by an inverse elasticity rule. This rule depends on the global response of the employment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two responses. For plausible values of the parameters, our matching environment induces much lower employment tax rates than the usual competitive model with endogenous participation only. However, optimal employment tax rates are larger (in absolute value) when a given level of the global elasticity of employment is more due to search frictions and less due to participation responses. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Laurence Jacquet & Etienne Lehmann & Bruno Linden, 2014. "Optimal income taxation with Kalai wage bargaining and endogenous participation," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 42(2), pages 381-402, February.
  • Handle: RePEc:spr:sochwe:v:42:y:2014:i:2:p:381-402
    DOI: 10.1007/s00355-013-0736-0

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    References listed on IDEAS

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    Cited by:

    1. Kory Kroft & Kucko Kavan & Etienne Lehmann & Johannes Schmieder, 2015. "Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach," Working Papers hal-01292126, HAL.
    2. Adam M. Lavecchia, 2018. "Minimum Wage Policy with Optimal Taxes and Unemployment," Working Papers 1801E, University of Ottawa, Department of Economics.
    3. Kavan Kucko & Johannes Schmieder & Etienne Lehmann & Kory Kroft, 2015. "Optimal Income Taxation under Unemployment: A Sufficient Statistics Approach," 2015 Meeting Papers 680, Society for Economic Dynamics.

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