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Incentive separability

Author

Listed:
  • Filip Tokarski

    (Stanford University
    Group for Research in Applied Economics (GRAPE))

  • Joanna Krysta

    (Stanford University
    Group for Research in Applied Economics (GRAPE))

  • PaweÅ‚ Doligalski

    (Bristol University
    Group for Research in Applied Economics (GRAPE))

  • Piotr Dworczak

    (Northwestern University
    Group for Research in Applied Economics (GRAPE))

Abstract

We consider a general mechanism-design environment in which the planner faces incentive constraints such as the ones resulting from agents' private information or ability to take hidden actions. We study the properties of optimal mechanisms when some decisions are incentive-separable: A set of decisions is incentive-separable if, starting at some initial allocation, perturbing these decisions along agents' indifference curves preserves incentive constraints. We show that, under regularity conditions, the optimal mechanism allows agents to make unrestricted choices over incentive-separable decisions, given some prices and budgets. Using this result, we extend and unify the Atkinson-Stiglitz theorem on the undesirability of differentiated commodity taxes and the Diamond-Mirrlees production efficiency result. We also demonstrate how the analysis of incentive separability can provide a novel justification for in-kind redistribution programs similar to food stamps.

Suggested Citation

  • Filip Tokarski & Joanna Krysta & PaweÅ‚ Doligalski & Piotr Dworczak, 2023. "Incentive separability," GRAPE Working Papers 85, GRAPE Group for Research in Applied Economics.
    • Handle: RePEc:fme:wpaper:85
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    File URL: http://grape.org.pl/WP/85_Doligalski_website.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    equity-efficiency trade-off; separability; optimal taxation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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