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Signing distortions in optimal tax or other adverse selection models with random participation

Author

Listed:
  • Laurence Jacquet
  • Etienne lehmann
  • Bruno Van Der Linden

    () (THEMA, Universite de Cergy-Pontoise
    CREST
    IRES - Université Catholique de Louvain and FNRS)

Abstract

We develop a methodology to sign output distortions in the random participation framework. We apply our method to monopoly nonlinear pricing problem, to the regulatory monopoly problem and mainly to the optimal income tax problem. In the latter framework, individuals are heterogeneous across two unobserved dimensions: their skill and their disutility of participation to the labor market. We derive a fairly mild condition for optimal marginal tax rates to be non negative everywhere, implying that in-work e ort is distorted downwards. Numerical simulations for the U.S. con rm this property. Moreover, it is typically optimal to provide a distinct level of transfer to the non-employed and to workers with zero or negligible earnings.

Suggested Citation

  • Laurence Jacquet & Etienne lehmann & Bruno Van Der Linden, 2012. "Signing distortions in optimal tax or other adverse selection models with random participation," THEMA Working Papers 2012-27, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  • Handle: RePEc:ema:worpap:2012-27
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    File URL: http://thema.u-cergy.fr/IMG/documents/2012-27.pdf
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    References listed on IDEAS

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    Cited by:

    1. Laurent Simula, 2013. "Tax Competition and Migration," 2013 Meeting Papers 1126, Society for Economic Dynamics.

    More about this item

    Keywords

    Adverse selection; Optimal taxation; Random participation.;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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