Optimal Capital Taxation, Labour Unions, and the Hold-Up Problem

Tapio Palokangas

LABOUR, 2014, vol. 28, issue 4, 359-375

Abstract: This document examines optimal capital taxation with wage-setting labour unions when the government taxes consumption, labour, and capital. The results are as follows. If unions can commit themselves to particular wages for a long period, then there is no hold-up problem. Otherwise, the hold-up problem creates a positive link from capital accumulation to the wage. The optimal labour subsidy is positive and greater in the presence than in the absence of the hold-up problem. The optimal capital subsidy is zero in the absence, but positive in the presence of the hold-up problem.

Date: 2014
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