Abstract
Bunching is said to occur if individuals with different characteristics receive the same commodity bundle. This article analyzes bunching in a finite population optimal nonlinear income tax problem. Several easily-computed sufficient conditions for the optimality of particular bunching patterns as well as a simple necessary and sufficient condition for the optimal allocation to exhibit no bunching are presented. In addition, a characterization of the optimal allocation is provided. Is is shown that the bunching pattern obtained by S. Lollivier and J.-C. Rochet is a consequence of a convexity condition which is automatically satisfied in their continuum model but which is not generally satisfied in a finite model.
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Discussions with Steven Matthews and Dilip Mookherjee and the comments of two anonymous referees have been extremely helpful. The hospitality of the Center for Mathematical Studies in Economics and Management Science at Northwestern University and the research support of the Social Sciences and Humanities Research Council of Canada are gratefully acknowledged.
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Weymark, J.A. Bunching properties of optimal nonlinear income taxes. Soc Choice Welfare 3, 213–232 (1986). https://doi.org/10.1007/BF00433536
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DOI: https://doi.org/10.1007/BF00433536