Budget Cuts, Social Assistance and Voluntary Unemployment

Frank Stähler

Journal of Public Economic Theory, 2002, vol. 4, issue 4, 573-579

Abstract: The theory of optimal taxation has shown that bunching can be optimal under certain circumstances so that low–skilled agents are not offered any work incentives. Optimal bunching balances the marginal costs of voluntary unemployment and the marginal reduction in information rents for high–skilled workers. This paper demonstrates how the optimal scheme will change if the budget is cut. It shows that a tighter budget constraint will lead to more voluntary unemployment and less work incentives.

Date: 2002
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