Working Papers
"Entrepreneurial Taxation, Occupational Choice, and Credit Market Frictions"
This paper analyzes Pareto optimal non-linear taxation of profits and labor income in a private information economy with endogenous firm formation. Individuals differ in both their skill and their cost of setting up a firm, and choose between becoming workers and entrepreneurs. I show that a tax system in which entrepreneurial profits and labor income must be subject to the same non-linear tax schedule makes use of general equilibrium effects through wages to indirectly achieve redistribution between entrepreneurs and workers. As a result, constrained Pareto optimal policies can involve negative marginal tax rates at the top and, if available, input taxes that distort the firms' input choices. However, these properties disappear when a differential tax treatment of profits and labor income is possible, as for instance implemented by a corporate income tax. In this case, redistribution is achieved directly through the tax system rather than "trickle down" effects, and production efficiency is always optimal. When I extend the model to incorporate entrepreneurial borrowing in credit markets, I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. Even without redistributive objectives, this gives rise to an additional, corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a regressive profit tax may restore the efficient occupational choice.
"Competitive Markets without Commitment" (with Nick Netzer), revise & resubmit, Journal of Political Economy
In the presence of a time-inconsistency problem with optimal agency contracts, we show that competitive markets implement allocations that Pareto dominate those achieved by a benevolent planner, they induce strictly more effort, and they sometimes make the commitment problem disappear entirely. In particular, we analyze a model with moral hazard and two-sided lack of commitment. After agents have chosen a hidden effort and the need to provide incentives has vanished, firms can modify their contracts and agents can switch firms. As long as the ex-post market outcome satisfies a weak notion of competitiveness and sufficiently separates individuals who choose different effort levels, the market allocation is Pareto superior to a social planner's allocation. We construct a specific market game that naturally generates robust equilibria with these properties. In addition, we show that equilibrium contracts without commitment are identical to those with full commitment if the latter involve no cross-subsidization between individuals who choose different effort levels.
"Pareto-Optimal Taxation with Aggregate Uncertainty and Financial Markets," revise & resubmit, Journal of Economic Theory
This paper studies Pareto-optimal risk-sharing arrangements in a moral hazard economy with aggregate uncertainty and ex ante heterogeneous agents. I show that any such arrangement has to be such that ratios of expected inverse marginal utilities across different agents are independent of aggregate shocks. I use this condition to show how to implement Pareto-optima as equilibria when agents can trade claims to consumption contingent on aggregate shocks in financial markets. If aggregate and idiosyncratic shocks are independent, the implementation of optimal allocations does not require interventions in financial markets. If they also affect probability distributions over idiosyncratic risk, however, transaction taxes need to be introduced that are higher for claims to consumption in states with a more volatile distribution of likelihood ratios in the sense of second-order stochastic dominance. If transaction taxes are constrained to be linear, they need to condition on individual outputs in addition to aggregate shocks such that they induce additional risk for agents who buy financial claims and provide additional insurance to those who sell them. Finally, an implementation with non-linear transaction taxes that do not depend on idiosyncratic shocks is constructed.