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Tax policy and entrepreneurial entry with information asymmetry and learning

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We study a market with entrepreneurial and workers entry where both entrepreneurs' abilities and workers' qualities are private information. We develop an Agent-Based Computable model to mimic the mechanisms described in a previous analytical model (Boadway and Sato 2011). Then, we introduce the possibility that agents may learn over time about abilities and qualities of other agents, by means of Bayesian inference over informative signals. We show how such different set of assumptions affects the optimality of second-best tax and subsidy policies. While with no information it is optimal to have a subsidy to labour and a simultaneous tax on entrepreneurs to curb excessive entry, with learning a subsidy-only policy can be optimal as the detrimental effects of excessive entrepreneurial entry are (partly or totally) compensated by surplus-increasing faster learning.

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File URL: https://ec.europa.eu/jrc/sites/jrcsh/files/jrc105841.pdf
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Paper provided by Joint Research Centre (Seville site) in its series JRC Working Papers on Taxation & Structural Reforms with number 2017-01.

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Length: 21 pages
Date of creation: Feb 2017
Handle: RePEc:ipt:taxref:201701
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