Signing Distortions in Optimal Tax and Other Adverse Selection Problems with Random Participation

33 Pages Posted: 4 Apr 2012

See all articles by Laurence Jacquet

Laurence Jacquet

Catholic University of Louvain - Economic & Social Research Institute (IRES)

Etienne Lehmann

Université Paris II - Panthéon-Assas - ERMES

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales; IZA Institute of Labor Economics

Date Written: March 30, 2012

Abstract

We develop a methodology to sign output distortions in the random participation framework. We apply our method to monopoly nonlinear pricing problem, to the regulatory monopoly problem and mainly to the optimal income tax problem. In the latter framework, individuals are heterogeneous across two unobserved dimensions: their skill and their disutility of participation to the labor market. We derive a fairly mild condition for optimal marginal tax rates to be non negative everywhere, implying that in-work effort is distorted downwards. Numerical simulations for the U.S. confirm this property. Moreover, it is typically optimal to provide a distinct level of transfer to the non-employed and to workers with zero or negligible earnings.

Keywords: adverse selection, optimal taxation, random participation

JEL Classification: H210, H230

Suggested Citation

Jacquet, Laurence and Lehmann, Etienne and Van der Linden, Bruno, Signing Distortions in Optimal Tax and Other Adverse Selection Problems with Random Participation (March 30, 2012). CESifo Working Paper Series No. 3766. Available at SSRN: https://ssrn.com/abstract=2034235

Laurence Jacquet

Catholic University of Louvain - Economic & Social Research Institute (IRES) ( email )

B-1348 Louvain-la-Neuve
Belgium

Etienne Lehmann (Contact Author)

Université Paris II - Panthéon-Assas - ERMES ( email )

12 Place du Panthéon
Paris, Cedex 5, 75005
France

Bruno Van der Linden

Université Catholique de Louvain - Institut de Recherches Economiques et Sociales ( email )

3, Place Montesquieu
Louvain-la-Neuve, 1348
Belgium

HOME PAGE: http://perso.uclouvain.be/bruno.vanderlinden/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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