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Simple Labor Income Tax Systems with Endogenous Employment Contracts

Yiqing Xing and Anqi Li
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Yiqing Xing: Stanford University
Anqi Li: Washington University in St. Louis

No 866, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: We use firm's endogenous contractual response to help implement the constrained first best through a simple yet powerful progressive labor income tax system. In our model, workers privately experience both a persistent ability shock and many transient productivity shocks during their life cycles. The optimal tax system is anonymous and time-invariant, but it achieves two goals. First, it directly redistributes the life-cycle income across workers of different ability types. Second, it indirectly induces firms to insure workers against transient shocks with efficiency wage contracts.

Date: 2014
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
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More papers in 2014 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
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