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Estate Taxation and Human Capital with Information Externalities

Aaron Hedlund

No 1415, Working Papers from Department of Economics, University of Missouri

Abstract: This paper investigates the effects of estate taxation when firms cannot directly observe worker skill levels. Imperfect labor market signaling gives rise to an information externality that causes workers to free-ride off of others' human capital acquisition. Inherited wealth exacerbates the information externality because risk-averse workers with larger inheritances exert less effort to acquire skills. By reducing these inheritances, an estate tax induces greater skill acquisition effort, resulting in a higher number of skilled workers, and in many cases, increased wages and output. In a parametrized model, I establish that the optimal estate tax rate is significantly above zero.

Keywords: information externalities; signaling; free-rider problem; labor markets; bequests; inheritance taxes (search for similar items in EconPapers)
JEL-codes: D62 D82 E21 E24 E60 H21 (search for similar items in EconPapers)
Pages: 42 pgs.
Date: 2014-08-08
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-lma, nep-mac, nep-ore, nep-pbe and nep-pub
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