Signing distortions in optimal tax and other adverse selection problems with random participation

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

No 2012003, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

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)
Pages: 31
Date: 2012-03-13
New Economics Papers: this item is included in nep-cmp and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Signing Distortions in Optimal Tax and other Adverse Selection Problems with Random Participation (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2012003

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