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Optimal Income Taxation and Public Good Provision in a Two-Class Economy

  • Felix Bierbrauer

    ()

    (Max Planck Institute for Research on Collective Goods, Bonn)

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    This paper combines the problem of optimal income taxation with the free-rider problem in public good provision. There are two groups of individuals with private information on their earning ability and their valuation of a public good. Adjustments of the transfer system are needed to discourage the more productive from exaggerating the desirability of public good provision. Similarly, the less productive need to be prevented from understating their valuation. Relative to an optimal income tax, which focuses solely on earning ability, income transfers are increased whenever a public good is installed and are decreased otherwise.

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    File URL: http://www.coll.mpg.de/pdf_dat/2005_25online.pdf
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    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2005_25.

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    Length: 39 pages
    Date of creation: Nov 2005
    Date of revision:
    Handle: RePEc:mpg:wpaper:2005_25
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    1. Boadway, Robin & Keen, Michael, 1993. "Public Goods, Self-Selection and Optimal Income Taxation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 463-78, August.
    2. Ehud Kalai, 2002. "Large Robust Games," Discussion Papers 1350, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Jeffrey C. Ely & Kim-Sau Chung, 2004. "Foundations of Dominant Strategy Mechanisms," Econometric Society 2004 North American Summer Meetings 169, Econometric Society.
    4. Joseph E. Stiglitz, 1987. "Pareto Efficient and Optimal Taxation and the New New Welfare Economics," NBER Working Papers 2189, National Bureau of Economic Research, Inc.
    5. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
    6. Weymark, John A., 1986. "A reduced-form optimal nonlinear income tax problem," Journal of Public Economics, Elsevier, vol. 30(2), pages 199-217, July.
    7. Martin Hellwig, 2005. "A Contribution to the Theory of Optimal Utilitarian Income Taxation," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2005_23, Max Planck Institute for Research on Collective Goods.
    8. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
    9. Dirk Bergemann & Stephen Morris, 2003. "Robust Mechanism Design," Levine's Bibliography 666156000000000035, UCLA Department of Economics.
    10. Robin Boadway & Katherine Cuff & Maurice Marchand, 1999. "Optimal Income Taxation With Quasi-Linear Preferences Revisited," Working Papers 984, Queen's University, Department of Economics.
    11. Gabrielle Demange & Roger Guesnerie, 2001. "On coalitional stability of anonymous interim mechanisms," Economic Theory, Springer, vol. 18(2), pages 367-389.
    12. Jean-Jacques Laffont & David Martimort, 1997. "Collusion under Asymmetric Information," Econometrica, Econometric Society, vol. 65(4), pages 875-912, July.
    13. Hammond, Peter J, 1979. "Straightforward Individual Incentive Compatibility in Large Economies," Review of Economic Studies, Wiley Blackwell, vol. 46(2), pages 263-82, April.
    14. Bernheim, B. Douglas & Peleg, Bezalel & Whinston, Michael D., 1987. "Coalition-Proof Nash Equilibria I. Concepts," Journal of Economic Theory, Elsevier, vol. 42(1), pages 1-12, June.
    15. Joseph E. Stiglitz, 1981. "Self-Selection and Pareto Efficient Taxation," NBER Working Papers 0632, National Bureau of Economic Research, Inc.
    16. Laffont, Jean-Jacques & Martimort, David, 1999. " Collusion-Proof Samuelson Conditions for Public Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(4), pages 399-438.
    17. Al-Najjar, Nabil I., 2004. "Aggregation and the law of large numbers in large economies," Games and Economic Behavior, Elsevier, vol. 47(1), pages 1-35, April.
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