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Signaling and indirect taxation

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  • Tom TRUYTS

Abstract

Commodities communicate. Consumers choose a consumption bundle both for its intrinsic characteristics and for what this bundle communicates about their qualities (or .identity.) to spectators. We investigate optimal indirect taxation when consumption choices are motivated by two sorts of concerns: intrinsic consumption and costly signaling. Optimal indirect taxes are introduced into a monotonic signaling game with a finite typespace of consumers. We provide sufficient conditions for the uniqueness of the D1 sequential equilibrium in terms of strategies. In the case of pure costly signaling, signaling goods can in equilibrium be taxed without burden and the optimal quantity taxes on these goods are infinite. When commodities serve both intrinsic consumption and signaling, optimal taxes can be characterized by a generalization of the Ramsey rule, which also deals with the distortions resulting from signaling.

Suggested Citation

  • Tom TRUYTS, 2010. "Signaling and indirect taxation," Working Papers Department of Economics ces10.09, KU Leuven, Faculty of Economics and Business, Department of Economics.
  • Handle: RePEc:ete:ceswps:ces10.09
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    Keywords

    Optimal Taxation; Indirect Taxation; Costly Signaling; Identity.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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