Generalized Production Efficiency

Laurence Jacquet and Etienne Lehmann ()

No 2025-08, THEMA Working Papers from THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise

Abstract: When should governments sacrifice production efficiency for redistribution? We generalize the celebrated result of Diamond and Mirrlees (1971a,b) by allowing for imperfect competition, suboptimal and nonlinear taxation. We demonstrate that production efficiency hinges on the flexibility of the tax system in compensating gains and losses from changes in factor prices. This requires the tax system to target each factor’s income. We show how to adjust tax systems or production policies for imperfect targeting and market failures, even when the tax system is not flexible enough. Endogenous factor prices do not modify the test to identify Pareto-improving tax reforms.

Keywords: Production efficiency; Nonlinear income taxation; Several income sources (search for similar items in EconPapers)
JEL-codes: F13 H21 H22 H23 H24 L5 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-pbe
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Working Paper: Generalized Production Efficiency (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:ema:worpap:2025-08

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