Incentive separability

Filip Tokarski, Joanna Krysta, Pawel Doligalski and Piotr Dworczak
Additional contact information
Filip Tokarski: Stanford University
Joanna Krysta: Stanford University
Pawel Doligalski: Bristol University

No 85, GRAPE Working Papers from GRAPE Group for Research in Applied Economics

Abstract: We consider a general mechanism-design environment in which the planner faces incentive constraints such as the ones resulting from agents' private information or ability to take hidden actions. We study the properties of optimal mechanisms when some decisions are incentive-separable: A set of decisions is incentive-separable if, starting at some initial allocation, perturbing these decisions along agents' indifference curves preserves incentive constraints. We show that, under regularity conditions, the optimal mechanism allows agents to make unrestricted choices over incentive-separable decisions, given some prices and budgets. Using this result, we extend and unify the Atkinson-Stiglitz theorem on the undesirability of differentiated commodity taxes and the Diamond-Mirrlees production efficiency result. We also demonstrate how the analysis of incentive separability can provide a novel justification for in-kind redistribution programs similar to food stamps.

Keywords: equity-efficiency trade-off; separability; optimal taxation (search for similar items in EconPapers)
JEL-codes: D82 H21 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2023
New Economics Papers: this item is included in nep-des and nep-mic
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Working Paper: Incentive separability (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fme:wpaper:85

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