Department Seminar
Speaker: Piotr Dworczak (Northwestern)
Title: Inequality-aware Market Design and Income Taxation
Format: Hybrid
Homepage: Piotr Dworczak
Organiser: Matan
Abstract: Policymakers around the world frequently distort goods markets via price controls, differential taxation, or by providing in-kind transfers---oftentimes motivated by redistributive goals. Such policies conflict with conventional economic wisdom (based on results like the second welfare theorem or the Diamond-Mirrlees and Atkinson-Stiglitz theorems) that redistribution should take place primarily through lump-sum transfers and income taxation. In this project, we study a model in which the social planner maximizes a utilitarian welfare function (with social welfare weights) over a population of agents who are heterogenous in both their ability to generate income and their taste for goods. We allow the planner to use an arbitrary incentive-compatible mechanism subject to a resource constraint. We first uncover a generalization of the Atkinson-Stiglitz theorem by showing that goods should be provided at prices proportional to marginal costs if (i) individual utility functions feature no income effects, (ii) redistributive preferences depend only on agents’ ability, and (iii) there is no statistical correlation between ability and taste for goods. Second, however, we show that the conclusion of the Atkinson-Stiglitz theorem fails if any of the three assumptions is relaxed. In a special case of our model in which the ability type is binary and the taste type is continuous, we derive the optimal mechanism and characterize the nature of optimal distortions introduced in the goods market.
For more information please contact the organiser.