Optimal redistribution via income taxation and market design

Pawel‚ Doligalski, Piotr Dworczak, Mohammad Akbarpour and Scott Kominers
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Pawel‚ Doligalski: Group for Research in Applied Economics (GRAPE)
Mohammad Akbarpour: Stanford University

No 103, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: Policymakers often intervene in goods markets to effect redistribution---for example, via price controls, differential taxation, or in-kind transfers. We investigate the optimality of such policies alongside the (optimally-designed) income tax. In our framework, agents possess private information about their ability to generate income and consumption preferences, and a planner maximizes a social welfare function subject to resource constraints. We uncover a generalization of the Atkinson-Stiglitz theorem by showing that goods markets should be undistorted if (i) individual utility functions feature no income effects, (ii) redistributive preferences depend only on agents’ ability, and (iii) there is no statistical correlation between ability and taste for goods. We also show, however, that the conclusion of the Atkinson-Stiglitz theorem fails if any of the three assumptions is relaxed. In a special case of our model with linear utilities, binary ability, and continuous willingness to pay for a single good, we characterize the globally optimal mechanism and show that it may feature means-tested consumption subsidies, in-kind transfers, and differential commodity taxation.

Keywords: membership; allocative externalities; pricing tiers; rationing (search for similar items in EconPapers)
JEL-codes: D47 D82 H21 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2025
New Economics Papers: this item is included in nep-des, nep-mic and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:fme:wpaper:103

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