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Screening with convex menus and optimal flow taxation

Casey Rothschild ()

Journal of Public Economics, 2019, vol. 178, issue C

Abstract: This paper considers a family of screening problems in which the principal is constrained to offer only convex menus. Applications include: (i) optimal flow taxation when individuals can substitute consumption and leisure inter-temporally; (ii) optimal product design for a linear-pricing monopolist; (iii) non-exclusive-cum-linearly-priced annuity markets. A modified version of a Myerson (1979)-Mirrlees (1971) direct mechanism—in which standard incentive compatibility constraints are replaced by “no-convexification” constraints—can be used to compute optimal allocations in this family of problems. In the flow taxation application, the optimal tax schedule necessarily features progressive marginal tax rates, typically features “distortions at the top,” and can be analyzed by adapting standard ironing techniques.

Keywords: Convexification; Ironing; Tax smoothing (search for similar items in EconPapers)
JEL-codes: D82 H21 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jpubeco.2019.104052

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