Investment, Adverse Selection and Optimal Redistributive Taxation

Anastasios Dosis
Additional contact information
Anastasios Dosis: Essec Business School, Economics Department

No WP1605, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: I study a credit market with adverse selection as a signalling game. I show that in the least-costly separating equilibrium, entrepreneurs of high-quality projects may over-or under-invest compared to the social optimum to signal their type. I then examine a simple budget-balanced tax-subsidy scheme applied by the government. At a first sight, the tax-subsidy scheme seems to benefit entrepreneurs of low-quality projects and harm entrepreneurs of high-quality projects because the former are cross-subsidised by the latter. Nonetheless, this result does not necessarily hold if entrepreneurs can pledge the subsidy as collateral. In that case, taxes can improve social welfare by either decreasing or increasing aggregate investment depending on whether entrepreneurs of high-quality projects over-or under-invest in equilibrium. Keywords : Adverse selection investment taxes welfare

Keywords: Adverse selection; investment; taxes; welfare (search for similar items in EconPapers)
JEL-codes: D04 D60 D82 D86 H25 H82 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2016-02-17
New Economics Papers: this item is included in nep-ent, nep-mic and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://hal-essec.archives-ouvertes.fr/hal-01285163/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ebg:essewp:dr-16005

Access Statistics for this paper

More papers in ESSEC Working Papers from ESSEC Research Center, ESSEC Business School ESSEC Research Center, BP 105, 95021 Cergy, France. Contact information at EDIRC.
Bibliographic data for series maintained by Sophie Magnanou ().