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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society
Optimal Feasible Tax Mechanism for a Heterogeneous Economy
Vol.23, No.3, September 2012, 213–236
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Byungchae Rhee
(Chungnam National University)
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Abstract
The main goal of this paper is to extend the model of optimal feasible tax mechanism developed in Rhee (2008) to a heterogeneous economy in which agents have different characteristics related to their income or wealth. We provide a full characterization of optimal feasible tax mechanism for such a heterogeneous economy and find that if the level of low endowment is relatively low, only the incentive compatibility constraint of a rich minority agent will be binding. We also present some interesting comparative statics analyses as to how the optimal mechanism will respond to a change in the primitives of the economy. These analyses explain how the incentive problem of a heterogeneous economy will be resolved efficiently under feasibility constraint.
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Keywords
Optimal taxation, Heterogeneity, Feasibility, Incentive compatibility, Informational rent |
JEL classification codes
H21, D71, D82 |
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