Investment, Adverse Selection and Optimal Redistributive Taxation

24 Pages Posted: 5 Mar 2016 Last revised: 20 Feb 2018

See all articles by Anastasios Dosis

Anastasios Dosis

ESSEC Business School; University of Cergy-Pontoise - THEMA

Date Written: February 17, 2016

Abstract

This paper studies redistributive taxation in a credit market with adverse selection and signaling. Entrepreneurs of high-quality projects may over- or under-invest relative to the social optimum to signal their type. An anonymous, budget-balanced, redistributive tax system unambiguously benefits entrepreneurs of low-quality projects because they are cross-subsidized by entrepreneurs of high-quality projects. Pledging government subsidies as collateral relaxes incentive constraints. In some cases, the cost of cross-subsidization is offset by the relaxation of incentive constraints, and hence, the tax system might create Pareto improvements by either increasing or decreasing aggregate investment.

Keywords: Adverse selection, investment, taxes, welfare

JEL Classification: D04, D60, D82, D86, H25, H82

Suggested Citation

Dosis, Anastasios, Investment, Adverse Selection and Optimal Redistributive Taxation (February 17, 2016). Available at SSRN: https://ssrn.com/abstract=2742603 or http://dx.doi.org/10.2139/ssrn.2742603

Anastasios Dosis (Contact Author)

ESSEC Business School

3 Avenue Bernard Hirsch
B.P 50105
Cergy - Pontoise Cedex, NA 95021
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

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