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Optimal Policy to Influence Individual Choice Probabilities

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  • Sheshinski, Eytan

Abstract

With varying aptitudes in different occupations,individuals typically maximize income by specializing in one occupation which promises the highest income. Due to numerous labor market imperfections anduncertainties, the choice of best occupation is accomplished with only partial success. We demonstrate that an income tax that reduces after-tax income differentials across occupations tends to exacerbate the errors of choice made by individuals. Following a model proposed by Tinbergen (1951) and developed by Houthakker (1974), we use Luce’s (1959) multinomial logit approach to evaluate the magnitude of the distortions due to errors in occupational choice caused by income taxation. In an example, we show that the deadweight loss can be as high as a third of total income.

Suggested Citation

  • Sheshinski, Eytan, 2000. "Optimal Policy to Influence Individual Choice Probabilities," MPRA Paper 55490, University Library of Munich, Germany, revised Dec 2002.
    • Handle: RePEc:pra:mprapa:55490
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    2. Ravi Kanbur & Jukka Pirttilä & Matti Tuomala, 2006. "Non‐Welfarist Optimal Taxation And Behavioural Public Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 20(5), pages 849-868, December.
    3. Mikhalishchev, Sergei, 2023. "Optimal menu when agents make mistakes," Research in Economics, Elsevier, vol. 77(1), pages 25-33.
    4. Carsten K. Nielsen, 2009. "Optimal economic institutions under rational overconfidence, with applications to the choice of exchange rate regime," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(4), pages 375-407, December.
    5. Kooreman, P. & Prast, H.M., 2007. "What does behavioral economics mean for policy? Challenges to savings and health policy in the Netherlands," Other publications TiSEM 6cfbfe7c-4bbf-4dab-820b-1, Tilburg University, School of Economics and Management.
    6. Jukka Pirttilä & Sanna Tenhunen, 2008. "Pawns and queens revisited: public provision of private goods when individuals make mistakes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(5), pages 599-619, October.
    7. Xianhua Dai, 2011. "Optimal Taxation under Income Uncertainty," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 121-138, May.
    8. Haaparanta, Pertti & Pirttila, Jukka, 2007. "Reforms and confidence," Journal of Development Economics, Elsevier, vol. 84(1), pages 534-550, September.
    9. Jörgen Weibull & Lars-Göran Mattsson & Mark Voorneveld, 2007. "Better May be Worse: Some Monotonicity Results and Paradoxes in Discrete Choice Under Uncertainty," Theory and Decision, Springer, vol. 63(2), pages 121-151, September.
    10. Nathan Berg & Gerd Gigerenzer, 2007. "Psychology Implies Paternalism? Bounded Rationality may Reduce the Rationale to Regulate Risk-Taking," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 28(2), pages 337-359, February.

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    JEL classification:

    • H00 - Public Economics - - General - - - General

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