WP  Global Economy  2019.07.16

Working Paper(19-005E) "Optimal taxation with directed search and moral hazard"

This is working paper.

I consider an optimal taxation problem in a directed search model with moral hazard. I show how a constrained efficient allocation can be achieved as an equilibrium allocation with unemployment benefits, income taxes, and subsidies for job creation. In particular, optimal income taxes are lump sum when the social welfare function is utilitarian, but they take the form of nonlinear income taxes when it is non-utilitarian. Furthermore, the income tax function has a simple form, with a clear relationship with the social welfare function, which makes a sharp contrast with the formula obtained in the standard Mirrleesian taxation literature.