Optimal wage redistribution in the presence of adverse selection in the labor market

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. In this paper we allude to a novel role played by the non-linear income tax system in the presence of adverse selection in the labor market due to asymmetric information between workers and firms. We show that an appropriate choice of the tax schedule enables the government to affect the wage distribution by controlling the transmission of information in the labor market. This represents an additional channel through which the government can foster the pursuit of its redistributive goals. Terms of use: Documents in EconStor mayJEL-Code: D820, H210, J310.

Optimal Redistributive Income Taxation and Efficiency Wages*

“…We also find that 5 Notice that imperfect monitoring in low-demanding jobs generates a second source of asymmetric information, between firms and workers employed in low-demanding jobs, on top of the standard asymmetric information problem between the government and the workers (regarding their skill type). In this sense, our paper also relates to a recent strand in the Mirrleesian literature (see Stantcheva, 2014;Bastani et al, 2015;Cremer and Roeder, 2017) analyzing optimal tax policy in settings with two sources of asymmetric information. The difference is that whereas, in the aforementioned papers, the second source of asymmetric information manifested itself in an adverse selection problem, in our model it manifests itself in a moral hazard problem.…”

Discrete Labor Supply: Empirical Evidence and Implications

“…We argued that the functioning of the labor markets that cause the discreteness in labor supply could be permanent features, such as the need to form contracts between employers and employees. If some of the discreteness could be changed, that could be a policy tool in itself affecting welfare, as argued by Bastani et al (2015).…”

“…dashed line) within an income range of 0-18,000 euros in bins of 100 euros for students with the default 9 subsidy months in each year, and for young part-time workers who are not students (see Table 2). The first vertical line at 0 denotes the lower limit in the estimation of broader earnings changes in the distribution estimated using equation (2), and the second and third lines denote the pre-and post-reform income thresholds, respectively. The figure illustrates that the earnings distribution after 2008 has a clearly different shape than before the reform, implying that the income threshold affects the shape of the whole labor income distribution, not just the region close to the notch point.…”

“…Furthermore, the distinctive discrete labor supply responses among students provide evidence of mechanisms that are likely to be applicable more broadly in the labor force, as typical labor markets feature even more discreteness than those where students work. 2 We apply a novel method we developed to estimate the earnings elasticity with respect to taxes when labor supply is discrete that uses the relocation of the income notch as exogenous variation. When labor supply is discrete, an appropriate elasticity concept is mobility elasticity, which measures earnings responses across discrete earnings locations as a response to a change in the average tax rates across these locations (Saez, 2002;Kreiner et al, 2015).…”

Pareto efficient income taxation without single-crossing

“…See alsoBastani et al (2015) for another example of a two-type model where both self-selection constraints may be binding at a separating equilibrium and where a pooling equilibrium may dominate a separating equilibrium.27 In other words, the indifference curves for users are not everywhere convex.…”