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We study the optimal design of nonlinear labor income tax for multiperson households. Each household consists of two workers with different productivity levels and unequal access to the family’s economic resources. We show how intrahousehold inequality, together with individual-oriented utilitarianism, generally leads to a misalignment between the household’s and government’s objectives, a state known as dissonance. We handle the multidimensionality that plagues the Mirrlees model by restricting preferences to be identical and iso-elastic and by focusing on taxes characterized by incomesplitting. This approach allows us to provide a complete solution for the screening problem, incorporate different degrees of assortative matching, and assess the role of dissonance in shaping the optimal tax schedule. We also investigate the welfare gains from gender-based policies.

Notional Defined Contributions (NDC) systems mimic the incentive structure of fully funded social security while preserving the Pay-as-you-go nature of most current systems. We study size-preserving social reforms which replace the current US system with alternative NDCs with many alternative contribution rules and deficit/GDP ratios. If one retains the current mandatory age-independent contribution rules we find change to an NDC to reduce welfare: the sacrifices in distributive and insurance properties are not compensated by the efficiency gains. NDCs are, however, flexible enough to allow for alternative contribution rules which increase welfare while preserving actuarial fairness. Contributions ought to be age-dependent and concentrated later on a worker’s career. The incentive structure induces an increase in capital accumulation that results, through general equilibrium effects, in welfare gains which are larger for low productivity workers, despite the increase in income inequality as captured by the Gini coefficient.

In a static setting, whether consumption or labor income is progressively taxed is irrelevant for household choices and welfare. In a dynamic setting, however, these two forms of progressivity have markedly di erent implications for how earnings vary along the life-cycle: in a stylized life-cycle model, progressive income tax act reducing Frisch elasticities of labor supply whereas progressive consumption taxes act reducing the elasticity of intertemporal substitution. After showing that the latter leads to less ine ciencies in the stylized model than the former, we explore the consequences of replacing the current U.S. tax system by one in which labor income are linear and consumption taxes are progressive. We nd welfare gains that exceed 10% in consumption equivalent variation terms for all possible speci cations in steady state comparisons. Welfare gains are attained in all our speci cations with either very small increases in the capital stock or even large declines.

How is aggregate risks optimally shared between workers and retirees? We break this question in two parts. First, how ought risk to be shared between two groups of agents: one which must be provided incentives to make effort and other, which no longer be incentivized? Second, since incentives may be backloaded through pension entitlements, how does backloading optimally vary across states of nature? After formalizing these two aspects of the problem, we show that perfect risk sharing is optimal for log utility and when aggregate productivity growth is i.i.d.. For all other cases, departures from perfect risk sharing are welfare improving if more risk is born by retirees (resp. workers) when productivity growth is persistent (resp. mean reverting). Our numerical implementations however suggest that perfect risk sharing is approximately optimal for commonly used parameter values.

Do the Revelation and Taxation Principles hold for multi-person householDo the Revelation and Taxation Principles hold for multi-person households? We provide a positive answer to the former and a negative to the latter if the household decision process is such that no mechanism can lead to inefficient choices. This unconditional version of Chiappori’s (1988) collective approach, offers a household model which can be used in a standard mechanism design approach.ds? We provide a positive answer to the former and a negative to the latter if the household decision process is such that no mechanism can lead to inefficient choices. This unconditional version of Chiappori’s (1988) collective approach, offers a household model which can be used in a standard mechanism design approach.

We study optimal labor income taxation in non-competitive labor markets. Firms offer screening contracts to workers who have private information about their productivity. A planner endowed with a Paretian social welfare function tries to induce allocations that maximize its objective. We provide necessary and sufficient conditions for implementation of constrained efficient allocations using tax schedules. All allocations that are implementable by a tax schedule display negative marginal tax rates for almost all workers. Not all allocations that are implementable in a competitive setting are implementable in this noncompetitive environment.

The Forward Premium Puzzle (FPP) is how the empirical observation of a negative relation between future changes in the spot rates and the forward premium is known. Modeling this forward bias as a risk premium and under weak assumptions on the behavior of the pricing kernel, we characterize the potential bias that is present in the regressions where the FPP is observed and we identify the necessary and sufficient conditions that the pricing kernel has to satisfy to account for the predictability of exchange rate movements. Next, we estimate the pricing kernel applying two methods: i) one, du.e to Araújo et aI. (2005), that exploits the fact that the pricing kernel is a serial correlation common feature of asset prices, and ii) a traditional principal component analysis used as a procedure 1;0 generate a statistical factor modeI. Then, using on the sample and out of the sample exercises, we are able to show that the same kernel that explains the Equity Premi um Puzzle (EPP) accounts for the FPP in all our data sets. This suggests that the quest for an economic mo deI that generates a pricing kernel which solves the EPP may double its prize by simultaneously accounting for the FPP.

Introducing dynamics to Mirrlees' (1971) optimal taxation model creates a whole new set of issues that are only starting to be investigated in the literature. When choices are made before one's realizing her productivity incentive constraints ought to be defined as a function of more complex strategies than in the static case. 80 far, all work has assumed that these choices are observable and can be contracted upon by the government. Here we investigate choices that : i) are not observed, andj ii) affect preferences conditional Oil the realization of types. In the simplest possible model where a non-trivial filtration is incorporated we show how these two characteristics make it necessary for IC constraints to be defined in terms of strategies rather than pure announcements. Tax prescriptions are derived, and it is shown that they bear some resemblance to classic optimal taxation results. We are able to show that in the most 'natural' cases return on capital ought to be taxed . However, we also show that the uniform taxation prescription of Atkinson and Stiglitz fails to hold, in general.

Consider the demand for a good whose consumption be chosen prior to the resolution of uncertainty regarding income. How do changes in the distribution of income affect the demand for this good? In this paper we show that normality, is sufficient to guarantee that consumption increases of the Radon-Nikodym derivative of the new distribution with respect to the old is non-decreasing in the whole domain. However, if only first order stochastic dominance is assumed more structure must be imposed on preferences to guanantee the validity of the result. Finally a converse of the first result also obtains. If the change in measure is characterized by non-decreasing Radon-Nicodyn derivative, consumption of such a good will always increase if and only if the good is normal.

We study the optimal 'inflation tax' in an environment with heterogeneous agents and non-linear income taxes. We first derive the general conditions needed for the optimality of the Friedman rule in this setup. These general conditions are distinct in nature and more easily interpretable than those obtained in the literature with a representative agent and linear taxation. We then study two standard monetary specifications and derive their implications for the optimality of the Friedman rule. For the shopping-time model the Friedman rule is optimal with essentially no restrictions on preferences or transaction technologies. For the cash-credit model the Friedman rule is optimal if preferences are separable between the consumption goods and leisure, or if leisure shifts consumption towards the credit good. We also study a generalized model which nests both models as special cases.

We investigate optimal commodity taxation in a social insurance framework based on Varian (1980). We show that the tax prescriptions in this moral hazard framework are notably similar to those derive from models based on Mirrlees' (1971) self-selection framework. In particular, Atkinson and Stiglitz's (1976) results on uniform commodity taxation are valid in this setup. We incorporate pre-committed goods - those whose consumption must be decided before the resolution of uncertainty - and show that tax prescriptions are also analogous to the existing literature. The robustness of tax rules across these setups is explained by the relaxation of incentive compatibility constraints.