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Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks

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  • Felix Bierbrauer

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

Abstract

We study how an optimal income tax and an optimal public-goods provision rule respond to preference and productivity shocks. A conventional Mirrleesian treatment is shown to provoke manipulations of the policy mechanism by individuals with similar interests. We therefore extend the Mirrleesian model so as to include a requirement of coalition-proofness. The main results are the following: first, the possibility of preference shocks yields a new set of collective incentive constraints. Productivity shocks have no such implication. Second, the optimal policy gives rise to a positive correlation between the public-goods provision level, the extent of redistribution and marginal tax rates.

Suggested Citation

  • Felix Bierbrauer, 2010. "Optimal Income Taxation and Public-Goods Provision with Preference and Productivity Shocks," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2010_18, Max Planck Institute for Behavioral Economics.
    • Handle: RePEc:mpg:wpaper:2010_18
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    References listed on IDEAS

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    1. 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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    Cited by:

    1. Felix Bierbrauer & Martin Hellwig, 2011. "Mechanism Design and Voting for Public-Good Provision," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2011_31, Max Planck Institute for Behavioral Economics.

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    More about this item

    Keywords

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    JEL classification:

    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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