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Title:Signing distortions in optimal tax and other adverse selection problems with random participation PDF Logo
Authors:Jacquet, Laurence
Lehmann, Etienne
Van der Linden, Bruno
Issue Date:2012
Series/Report no.:CESifo working paper: Public Finance 3766
Abstract:We develop a methodology to sign output distortions in the random participation framework. We apply our method to monopoly nonlinear pricing problem, to the regulatory monopoly problem and mainly to the optimal income tax problem. In the latter framework, individuals are heterogeneous across two unobserved dimensions: their skill and their disutility of participation to the labor market. We derive a fairly mild condition for optimal marginal tax rates to be non negative everywhere, implying that in-work effort is distorted downwards. Numerical simulations for the U.S. confirm this property. Moreover, it is typically optimal to provide a distinct level of transfer to the non-employed and to workers with zero or negligible earnings.
Subjects:adverse selection
optimal taxation
random participation
JEL:H21
H23
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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