Optimal Policy to Influence Individual Choice Probabilities

Sheshinski, Eytan (2000): Optimal Policy to Influence Individual Choice Probabilities.

Abstract

With varying aptitudes in different occupations,individuals typically maximize income by specializing in one occupation which promises the highest income. Due to numerous labor market imperfections anduncertainties, the choice of best occupation is accomplished with only partial success. We demonstrate that an income tax that reduces after-tax income differentials across occupations tends to exacerbate the errors of choice made by individuals. Following a model proposed by Tinbergen (1951) and developed by Houthakker (1974), we use Luce’s (1959) multinomial logit approach to evaluate the magnitude of the distortions due to errors in occupational choice caused by income taxation. In an example, we show that the deadweight loss can be as high as a third of total income.

• Item Type: MPRA Paper
• Language: English
• Keywords: Distribution of aptitudes, size distribution of income, logit model.
• Subjects: H - Public Economics > H0 - General > H00 - General

References

[1] Houthakker, H. (1974), ”The Size Distribution of Labor Incomes Derived From the Distribution of Aptitudes” in W. Sellekaerts. (ed.) Econometrics and Economic Theory.

[2] Luce, D. (1959), Individual Choice Behavior: A Theoretical Analysis (Wiley).

[3] Sheshinski, E. (1983), “Wage Policy in the Public Sector abd Income Distribution” Helpman, E., A. Razin and E. Sadka (eds.) Social Policy Evaluation: An Economic Perspective (Academic Press), 299-309.

[4] Tinbergen, J. (1951) “Some Remarks om the Distribution of Labor Incomes”, International Economic Papers, 195-207.