Social Choice and Welfare

, Volume 42, Issue 2, pp 381–402 | Cite as

Optimal income taxation with Kalai wage bargaining and endogenous participation

  • Laurence Jacquet
  • Etienne Lehmann
  • Bruno Van der Linden
Original Paper

Abstract

This paper characterizes the optimal redistributive tax schedule in a search–matching framework where (voluntary) nonparticipation and (involuntary) unemployment are endogenous and wages are determined by proportional bargaining à la Kalai. The optimal employment tax rate is given by an inverse elasticity rule. This rule depends on the global response of the employment rate, which depends not only on the participation (labor supply) responses, but also on the vacancy posting (labor demand) responses and on the product of these two responses. For plausible values of the parameters, our matching environment induces much lower employment tax rates than the usual competitive model with endogenous participation only. However, optimal employment tax rates are larger (in absolute value) when a given level of the global elasticity of employment is more due to search frictions and less due to participation responses.

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Laurence Jacquet
    • 1
  • Etienne Lehmann
    • 2
    • 3
  • Bruno Van der Linden
    • 4
    • 5
  1. 1.THEMA, University of Cergy-PontoiseCergy-Pontoise CedexFrance
  2. 2.CRED (TEPP), University Panthéon-Assas Paris 2ParisFrance
  3. 3.CRESTParisFrance
  4. 4.IRES, Université Catholique de LouvainLouvain-La-NeuveBelgium
  5. 5.FNRSBrusselsBelgium

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