Signing Distortions in Optimal Tax and other Adverse Selection Problems with Random Participation

Laurence Jacquet, Etienne Lehmann () and Bruno Van der Linden

No 3766, CESifo Working Paper Series from CESifo

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.

Keywords: adverse selection; optimal taxation; random participation (search for similar items in EconPapers)
JEL-codes: H21 H23 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Signing distortions in optimal tax and other adverse selection problems with random participation (2012)
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