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Schedule Selection by Agents: from Price Plans to Tax Tables

  • Luttmer, Erzo F. P.

    (Harvard U)

  • Zeckhauser, Richard

Requiring agents with private information to select from a menu of incentive schedules can yield efficiency gains. It will do so if, and only if, agents will receive further private information after selecting the incentive schedule but before taking the action that determines where on the incentive schedule they end up. We argue that this information structure is relevant in many applications. We develop the theory underlying optimal menus of non-linear schedules and prove that there exists a menu of schedules that offers a strict first-order interim Pareto improvement over the optimal single non-linear schedule. We quantify the gains from schedule selection in two settings. The first is a stylized example of a monopolistic utility company increasing profits by offering a menu of price plans. The second is a simulation based on U.S. earnings data, which shows that moving to a tax system that allows individuals to choose their tax schedule increases social welfare by the same amount as would occur from a 4.0 percent windfall gain in the government budget (or about $600 per filer per year). The resulting reduction in distortions accounts for about two thirds of the increase in social welfare while the remainder comes from an increase in redistribution.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp08-008.

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Date of creation: Feb 2008
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Handle: RePEc:ecl:harjfk:rwp08-008
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  1. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  2. Miravete, Eugenio J, 2000. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," CEPR Discussion Papers 2635, C.E.P.R. Discussion Papers.
  3. Michael D. Grubb, 2006. "Selling to Overconfident Consumers," Discussion Papers 06-018, Stanford Institute for Economic Policy Research.
  4. Stefania Albanesi & Christopher Sleet, 2004. "Dynamic optimal taxation with private information," Discussion Paper / Institute for Empirical Macroeconomics 140, Federal Reserve Bank of Minneapolis.
  5. Susanna Esteban & Eiichi Miyagawa, 2005. "Optimal Menu of Menus with Self-Control Preferences," NajEcon Working Paper Reviews 784828000000000455, www.najecon.org.
  6. Eliaz, Kfir & Spiegler, Ran, 2004. "Contracting with Diversely Naive Agents," CEPR Discussion Papers 4573, C.E.P.R. Discussion Papers.
  7. N. Gregory Mankiw & Matthew Weinzierl, 2009. "The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution," NBER Working Papers 14976, National Bureau of Economic Research, Inc.
  8. Alberto Alesina & Philippe Weil, 1992. "Menus of Linear Income Tax Schedules," NBER Working Papers 3968, National Bureau of Economic Research, Inc.
  9. Clay, Karen B & Sibley, David S & Srinagesh, Padmanabhan, 1992. "Ex Post vs. Ex Ante Pricing: Optional Calling Plans and Tapered Tariffs," Journal of Regulatory Economics, Springer, vol. 4(2), pages 115-38, June.
  10. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
  11. Loukas Karabarbounis & Andrea Ichino & Alberto Alesina, 2008. "Gender based Taxation," 2008 Meeting Papers 500, Society for Economic Dynamics.
  12. repec:oup:restud:v:78:y::i:4:p:1490-1518 is not listed on IDEAS
  13. Eugenio J. Miravete, 2005. "The Welfare Performance Of Sequential Pricing Mechanisms ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(4), pages 1321-1360, November.
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