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


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.


Labor Supply Labor Demand Labor Supply Response Labor Demand Elasticity Inverse Elasticity Rule 



We thank the editor Marc Fleurbaey, two anonymous referees, Bas Jacobs, Guy Laroque, Jean-Marie Lozachmeur, Franck Malherbet, Louis Perrault, Laurent Simula, Alfons Weichenrieder and participants at the CPEG 2010 workshop at Queens’ University, the Nordic Workshop on Tax Policy and Public Economics in Copenhagen, the CESifo conference on Public Sector Economics, the workshop on “Taxation and Redistribution” at Linz, the 10th Journées Louis André Gérard Varet in Marseilles, the economic theory seminar at THEMA and the CESifo conference on “Taxation, Transfer and the Labour Market 2011” for helpful comments. Laurence Jacquet’s research was supported by a Marie Curie FP7 Integration Grant within the 7th European Union Framework Programme. Bruno Van der Linden has benefited from the financial supports of the Belgian French-speaking Community (convention ARC 09/14-019 on Geographical Mobility of Factors) and of the Belgian Program on Interuniversity Poles of Attraction (P6/07 Economic Policy and Finance in the Global Economy: Equilibrium Analysis and Social Evaluation).


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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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