Taxes and the Efficiency-Rent Extraction Trade-off
This paper presents an adverse selection model in which progressive taxation enhances productive efficiency by encouraging a principal (buyer) to be less aggressive in contracting with an agent (seller). Wary of padded cost budgets, the buyer employs a hurdle-rate procurement policy. With a low cost hurdle, the buyer keeps greater profits when transactions are undertaken but trade occurs less often. While the hurdle is unaffected by a flat tax, a progressive tax tilts the buyer's preference: the buyer's benefit from a lower hurdle becomes less pronounced, since the marginal increase in his profits is muted in after-tax terms. The result is increased trade and the possibility of Pareto improvements. Copyright 2006 Blackwell Publishing, Inc..
Year of publication: |
2006
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Authors: | ARYA, ANIL ; GLOVER, JONATHAN ; MITTENDORF, BRIAN |
Published in: |
Journal of Public Economic Theory. - Association for Public Economic Theory - APET, ISSN 1097-3923. - Vol. 8.2006, 5, p. 741-760
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Publisher: |
Association for Public Economic Theory - APET |
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