Investment, Adverse Selection and Optimal Redistributive Taxation

Anastasios Dosis ()
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Anastasios Dosis: ESSEC Business School and THEMA (UMR 8184) - ESSEC Business School - THEMA - Théorie économique, modélisation et applications - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université

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Abstract: I study a credit market with adverse selection as a signalling game. I show that in the least-costly separating equilibrium, entrepreneurs of high-quality projects may over-or under-invest compared to the social optimum to signal their type. I then examine a simple budget-balanced tax-subsidy scheme applied by the government. At a first sight, the tax-subsidy scheme seems to benefit entrepreneurs of low-quality projects and harm entrepreneurs of high-quality projects because the former are cross-subsidised by the latter. Nonetheless, this result does not necessarily hold if entrepreneurs can pledge the subsidy as collateral. In that case, taxes can improve social welfare by either decreasing or increasing aggregate investment depending on whether entrepreneurs of high-quality projects over-or under-invest in equilibrium.

Keywords: Adverse selection; investment; taxes; welfare (search for similar items in EconPapers)
Date: 2016-02-17
New Economics Papers: this item is included in nep-cta, nep-ent and nep-pbe
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