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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