Optimal taxation with directed search and moral hazard

In today's Macro seminar Tomoyuki Nakajima from the University of Tokyo, discusses his paper on Optimal taxation with directed search and moral hazard.

Tomoyuki Nakajima from the faculty of economics at the University of Tokyo joins us this week to present a Macro seminar on his paper Optimal taxation with directed search and moral hazard.

Abstract:

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 non-linear 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—in sharp contrast to the formula obtained in the standard Mirrleesian taxation literature, where the optimal tax function typically takes a very complicated form.