“Optimal income taxation with adverse selection and moral hazard” by C.C. YANG
Academia Sinica, Taiwan
This paper addresses optimal income taxation with the co-existence of adverse selection and moral hazard. We proceed our mechanism design analysis in a setting where the expected utility of consumption can be well approximated by the mean-variance approach. It is shown that we can implement the socially optimal allocation by the same optimal marginal tax schedule as prescribed in Diamond (1998), except for a difference: While there is a communication between the government and taxpayers in the sense of Melumad and Reichelstein (1989) in our environment, such a communication is unnecessary in Diamond's environment.