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Adverse selection in credit markets and regressive profit taxation


Scheuer, Florian (2013). Adverse selection in credit markets and regressive profit taxation. Journal of Economic Theory, 148(4):1333-1360.

Abstract

In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.

Abstract

In many countries, taxes on businesses are less progressive than labor income taxes. This paper provides a justification for this pattern based on adverse selection that entrepreneurs face in credit markets. Individuals choose between becoming entrepreneurs or workers and differ in their skill in both of these occupations. I find that endogenous cross-subsidization in the credit market equilibrium results in excessive (insufficient) entry of low-skilled (high-skilled) agents into entrepreneurship. This gives rise to a corrective role for differential taxation of entrepreneurial profits and labor income. In particular, a profit tax that is regressive relative to taxes on labor income restores the efficient occupational choice.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Multidimensional screening; credit markets; entrepreneurial taxation; occupational choice
Language:English
Date:July 2013
Deposited On:07 Aug 2017 15:46
Last Modified:09 Dec 2017 01:45
Publisher:Elsevier
ISSN:0022-0531
Additional Information:Auch erschienen als NBER Working Paper Nr. 18406
Publisher DOI:https://doi.org/10.1016/j.jet.2013.04.010
Related URLs:http://www.nber.org/papers/w18406

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