Moral Hazard, Income Taxation and Prospect Theory

Ravi Kanbur, Jukka Pirttilä () and Matti Tuomala

Scandinavian Journal of Economics, 2008, vol. 110, issue 2, pages 321-337

Abstract: The standard theory of optimal income taxation under uncertainty has been developed under the assumption that individuals maximise expected utility. However, prospect theory has now been established as an alternative model of individual behaviour, with empirical support. This paper explores the theory of optimal income taxation under uncertainty when individuals behave according to the tenets of prospect theory. It is seen that many of the standard results are modified in interesting ways. The first-order approach for solving the optimisation problem is not valid over the domain of losses, and the marginal tax schedule offers full insurance around the reference consumption level. The implications of non-welfarist objectives under income uncertainty are also examined. Copyright © The editors of the "Scandinavian Journal of Economics" 2008 .

Date: 2008

Downloads: (external link)
http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9442.2008.00541.x link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:bla:scandj:v:110:y:2008:i:2:p:321-337

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0347-0520

Access Statistics for this article

Scandinavian Journal of Economics is edited by Jonas Agell, Nils Gottfries and Espen R. Moen

More articles in Scandinavian Journal of Economics from Blackwell Publishing
Series data maintained by Christopher F. Baum ().