Optimal taxation with directed search and private information

Tomoyuki Nakajima
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Tomoyuki Nakajima: Faculty of Economics, The University of Tokyo

No CIRJE-F-1275, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: I study optimal taxation in a directed–search economy with moral hazard, in which firms post output–contingent wage contracts that provide workers with insurance and incentives. Because the market prices these margins, the income tax is freed to redistribute alone: it is lump sum under a utilitarian planner, and under a non–utilitarian planner its marginal rate takes the transparent form τ′(ω)/[1 − τ′(ω)] = −κ κγ′(c (ω)), proportional to the slope of the social welfare weight at realized consumption and free of the skill distribution and labor–supply elasticities that dominate the Mirrleesian formula. A subsidy to vacancy creation corrects a fiscal externality on job creation, and an unemployment benefit handles the extensive margin. I then let productivity be unobservable. Single–crossing survives the moral hazard, so the downward incentive constraint binds and the high type retains an information rent; the resulting screening distortion is borne by the market’s wage schedule rather than by the tax, and the optimal anonymous income tax keeps the transparent form with the redistributive coefficient replaced by a composition–weighted average across types. A calibrated example gives the mechanism quantitative content.

Pages: 46 pages
Date: 2026-07
New Economics Papers: this item is included in nep-des and nep-pub
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