Optimal Tax-Subsidy Schemes in a Screening Model of the Labor Market with Information Externalities

Peter C Coyte

Public Finance = Finances publiques, 1990, vol. 45, issue 1, 37-58

Abstract: This paper develops a screening model with a continuum of workers who differ in their productive capacity. Although this capacity is known by workers, it is only observed by employers if workers signal their productivity. A unique equilibrium exists in which signalers earn their marginal product, while others earn a wage commensurate with the average output of the pool of unscreened workers. Since signaling alters the wage earned by others, a divergence occurs between the private and the social return from signaling. This divergence is eliminated by designing a tax/subsidy scheme that maximizes two alternative measures of welfare.

Date: 1990
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Persistent link: https://EconPapers.repec.org/RePEc:pfi:pubfin:v:45:y:1990:i:1:p:37-58

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