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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Optimal Feasible Tax Mechanism for a Heterogeneous Economy

Vol.23, No.3, September , 213–236



  •   (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.


Keywords
   Optimal taxation, Heterogeneity, Feasibility, Incentive compatibility, Informational rent

JEL classification codes
   H21, D71, D82
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