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Moral Hazard and Optimal Commodity Taxation

  • Richard J. Arnott
  • Joseph E. Stiglitz

The central result of this paper is that when moral hazard ispresent,competitive equilibrium is almost always (constrained) inefficient. Moral hazard causes shadow prices to deviate from market prices. To remedy this market failure, the government could introduce differential commodity taxation. Moral hazard causes people to take too little care to prevent accidents. The corresponding dead-weight loss can be reduced by subsidizing (taxing) those goods the consumption of which encourages (discourages) accident avoidance.At the (constrained) optimum, the sum of the deadweight losses as-sociated with moral hazard, on the one hand, and differential commodity taxation, on the other, is minimized.

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File URL: http://www.nber.org/papers/w1154.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1154.

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Date of creation: Jun 1983
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Publication status: published as Arnott, Richard J. and Joseph E. Stiglitz. "Moral Hazard and Optimal Commodity Taxation." Journal of Public Economics, Vol. 29, (1986), pp. 1-24.
Handle: RePEc:nbr:nberwo:1154
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  5. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
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  7. anonymous, 1982. "International economic situation and outlook," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, january/f.
  8. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Oxford University Press, vol. 38(2), pages 175-208.
  9. Anonymous, 1982. "The Biologic and Economic Assessment of 2, 4, 5-T," Technical Bulletins 157646, United States Department of Agriculture, Economic Research Service.
  10. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February.
  11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  12. Richard Arnott & Arthur Hosios & Joseph Stiglitz, 1983. "Implicit Contracts, Labour Mobility and Unemployment," Working Papers 543, Queen's University, Department of Economics.
  13. anonymous, 1982. "New Zealand economic chronology 1981," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, january/f.
  14. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  15. Weiss, Laurence, 1976. "The Desirability of Cheating Incentives and Randomness in the Optimal Income Tax," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1343-52, December.
  16. Spence, Michael & Zeckhauser, Richard, 1971. "Insurance, Information, and Individual Action," American Economic Review, American Economic Association, vol. 61(2), pages 380-87, May.
  17. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
  18. anonymous, 1982. "Economic policy measures," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, july.
  19. anonymous, 1982. "International economic situation and developments," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 45, august.
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