Exploring the Shavellian Boundary: Violations from Judgment-Proofing, Minority Rights, and Signalling
17 Pages Posted: 26 Sep 2006
Date Written: May 2006
Shavell compared redistribution by tax to redistribution by the alteration of a rule. The comparison shows that altering an optimal rule for redistribution is inferior. The additional redistribution, whether by tax or by rule alteration, induces some loss of productivity by pushing individuals toward more leisure. The rule alteration has the additional drawback of inducing suboptimal conduct. The present paper explores the contours of this thesis by exploring three exceptions.
The first exception is excessive liability on a leisure activity. Conventional analysis finds it equivalent to a use tax or tariff. To the extent this is focused on a leisure activity, it can be synergistic with, and improve on, an optimal income tax regime by deterring leisure. However, the fact that the liability of poor individuals can be judgment proof indicates that the altered rule may be superior to a tariff because its effect of deterring leisure and inducing work would be felt most by the more productive individuals.
The second exception is minority rights that produce redistribution and are not subject to a paretian exchange. If the minority beneficiaries cannot compensate the majority, the right appears undesirable whereas a deeper analysis may justify it because of its redistributive effect. The analysis is applied to the example of a right to abortion.
Finally, the third exception is that some redistributive rules may produce signaling equilibria that produce further gains. The analysis is applied to a housing subsidy (which is visible, as opposed to an unverifiable tax subsidy).
Keywords: optimal taxation, chilling effect, minority rights, use tax, tariff, signalling equilibrium, abortion, housing subsidy
JEL Classification: D31, D63, H21, K19, K34
Suggested Citation: Suggested Citation