Felix J. Bierbrauer

On the Legitimacy of Coercion for the Financing of Public Goods

The literature on public goods has shown that efficient outcomes are impossible if participation constraints have to be respected. This paper addresses the question whether they should be imposed. It asks under what conditions efficiency considerations justify that individuals are forced to pay for public goods that they do not value. It is shown that participation constraints are desirable if public goods are provided by a malevolent Leviathan. By contrast, with a Pigouvian planner, efficiency can be achieved. Finally, the paper studies the delegation of public goods provision to a profit-maximizing firm. This also makes participation constraints desirable.

On the Optimality of Optimal Income Taxation

The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (1993) that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty’s critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system.

Strategic nonlinear income tax competition with perfect labor mobility

Tax competition between two governments who choose nonlinear income tax schedules to maximize the average utility of its residents when skills are unobservable and labor is perfectly mobile is examined. We show that there are no Nash equilibria in which there is a skill type that pays positive taxes to one country and whose utility is larger than the average utility in the other country or in which the lowest skilled are subsidized. We also show that it is possible for the most highly skilled to receive a net transfer funded by taxes on lower skilled individuals in equilibrium. These findings confirm the race-to-the-bottom thesis in this setting.

Mechanism design and intentions

We introduce intention-based social preferences into a mechanism design framework with independent private values and quasilinear payoffs. For the case where the designer has no information about the intensity of social preferences, we provide conditions under which mechanisms which have been designed under the assumption that agents are selfish can still be implemented. For the case where precise information about social preferences is available, we show that any tension between efficiency, incentive-compatibility, and voluntary participation may disappear. Impossibility results such as the one by Myerson and Satterthwaite (1983) are then turned into possibility results. We also provide a systematic account of the welfare implications of kindness sensations.

The Pareto-Frontier in a simple Mirrleesian model of income taxation

We characterize the Pareto-frontier in a simple Mirrleesian model of income taxation. We show how the second-best frontier which incorporates incentive constraints due to private information on productive abilities relates to the first-best frontier which takes only resource constraints into account. In particular, we argue that the second-best frontier can be interpreted as a Laffer-curve. We also use this second-best frontier for a comparative statics analysis of how optimal income tax rates vary with the degree of inequity aversion, and for a characterization of optimal public-good provision. We show that a more inequity averse policy maker chooses tax schedules that are more redistributive and involve higher marginal tax rates, while simultaneously providing less public good.

A unified approach to the revelation of public goods preferences and to optimal income taxation

We study a large economy model in which individuals have private information about their productive abilities and their preferences for public goods. A mechanism design approach is used to characterize implementable tax and expenditure policies. A robustness requirement in the sense of Bergemann and Morris (2005) yields individual incentive compatibility constraints that are equivalent to those in the theory of optimal income taxation in the tradition of Mirrlees (1971). Adding a requirement of coalition-proofness yields a set of collective incentive conditions which are akin those in the literature on public goods provision under private information on preferences, in the tradition of Clarke (1971) and Groves (1973).

Political Competition and Mirrleesian Income Taxation: A First Pass

We study Downsian competition in a Mirrleesian model of income taxation. The competing politicians may differ in competence. If politicians engage in vote-share maximization, the less competent politician’s policy proposals are attractive to the minority of rich agents, whereas those of the competent politician are attractive to the majority of poor agents. The less competent politician wins with positive probability, which gives rise to a political failure in the sense of Besley and Coate (1998). Political failures are avoided if politicians maximize winning probabilities. Nevertheless, the two equilibria cannot be Pareto-ranked, the minority may be better off under vote-share maximization.

Distortionary Taxation and the Free-Rider Problem

This paper derives a version of the Samuelson rule, which takes not only the marginal costs of public funds into account but also the desirability of preference revelation. Under a linear income tax more able individuals suffer from a larger utility loss if taxes are raised to cover the cost of public good provision. This implies that these individuals are tempted to understate their valuation of the public good. Likewise, less productive individuals are inclined to exaggerate their valuation. These incentive concerns require the use of excessive taxes. They ensure a truthful revelation of preferences for the public good. Under an optimal utilitarian tax constitution, individuals are not granted influence on public good provision if the taxes needed to induce informative behavior are prohibitively high.

Public-Good Provision in a Large Economy

We propose a new approach to the normative analysis of public-good provision in a large economy. Our analysis is based on a mechanism design approach that involves a requirement of coalition-proofness, as well as a requirement of robustness, so that the mechanism must not depend on specific assumptions about individual beliefs. Our main result shows that such a mechanism can condition only on the population shares of people with valuations above and below the per capita provision costs. This suggests an intriguing link between mechanism design for large economies and voting.

Optimal Democratic Mechanisms for Taxation and Public Good Provision

We study the interdependence of optimal tax and expenditure policies. An optimal policy requires that information on preferences is made available. We first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system. We then study democratic mechanisms with the property that tax payers vote over public goods. Under such a mechanism, efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases.