An Exploration of Incentive-Compatible ELIE

Laurent Simula and Alain Trannoy

No 812, IDEP Working Papers from Institut d'economie publique (IDEP), Marseille, France

Abstract: Simula and Trannoy (2007) have shown that ELIE is confronted with implementation issues when the policymaker cannot observe the time worked by every individual. This paper tries to fix this problem. To this aim, it characterizes the second-best allocations which are the closest to ELIE (i) in terms of welfare and (ii) in terms of transfers. In (i), we consider a welfarist setting in which the social weights are those required by ELIE to be generated as a first-best allocation. More precisely, these weights are defined by the tangent hyperplane to the first-best Pareto set at the ELIE allocation. We show that, in the absence of income effect on labour supply, the closest solution to ELIE is the laissez-faire. Moreover, simulations for a Cobb-Douglas economy show that the second-best transfers may then be substantially different from ELIE. This is why, in (ii), we construct second-best allocations which are both incentive-compatible and for which the income tax schedule generates net transfers which coincide with the first-best ELIE transfers. We show that there is a unique solution which is Pareto-efficient.

Keywords: Redistribution; Incentive Compatibility; Optimal Income Taxation. (search for similar items in EconPapers)
JEL-codes: D63 H21 H24 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2008-12-14, Revised 2008-12-14
New Economics Papers: this item is included in nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:iep:wpidep:0812

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