This note shows that, in case of suboptimal occupational choice, labor taxation can generate a relevant deadweight loss. With varying aptitudes in different occupations, individuals typically maximize income by specializing in one occupation which promises the highest income, but various labor market imperfections and uncertainties imply that the choice of the best occupation is accomplished with partial success. We use the multinomial Logit approach to evaluate the magnitude of the distortions due to errors in occupational choice caused by income taxation. Under plausible parameterization, we snow that the deadweight loss can be as high as a third of total income.

In this paper, we discuss a novel aspect of affirmative action policy. We examine its redistributive role, asking whether in an egalitarian society, supplementing the tax-transfer system with an affirmative action policy would enhance social welfare. We demonstrate that affirmative action could be a desirable policy tool even if racial discrimination does not exist in the labor market. JEL Classification: H2, D6 [...]

This note shows that, in case of suboptimal occupational choice, labor taxation can generate a relevant deadweight loss. With varying aptitudes in different occupations, individuals typically maximize income by specializing in one occupation which promises the highest income, but various labor market imperfections and uncertainties imply that the choice of the best occupation is accomplished with partial success. We use the multinomial Logit approach to evaluate the magnitude of the distortions due to errors in occupational choice caused by income taxation. Under plausible parameterization, we snow that the deadweight loss can be as high as a third of total income.

When individuals choose from whatever alternatives available to them the one that maximizes their utility then it is always desirable that the government provide them with as many alternatives as possible. Individuals, however, do not always choose what is best for them and their mistakes may be exacerbated by the availability of options. We analyze self-selection models, when individuals know more about themselves than it is possible for governments to know, and show that it may be socially optimal to limit and sometimes to eliminate individual choice. As an example, we apply Luce’s (1959) model of random choice to a [...]

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Individuals can insure themselves perfectly against uncertainty about the length of life by purchasing deferred annuities early in life. In the absence of other uninsurable uncertainties (e.g. income), there will be no residual purchases or sales of annuities later in life, thereby avoiding any adverse-selection. In contrast, the presence of such uncertainties creates an active residual annuity market based on the arrival of new information. We characterize the equilibrium in the residual annuity market and propose a new …nancial instrument, refundable annuities with a guaranteed refund price, which enables individuals who hold a portfolio of such annuities to better adjust [...]

This paper examines the interaction between the market for annuities and retirement and consumption decisions in the presence of lifetime uncertainty. We focus on two aspects of the demand for annuities: the timing of annuitization and the information available to the issuers of annuities with regard to purchasers ’ survival probabilities. The First-Best is attained by continuous annuitization of savings, with a guaranteed lump-sum payment to beneficiaries upon death. Annuitization of savings at retirement, and a-fortioti no annuitization, are inferior and lead to distortions in retirement and consumption decisions. Applying a ‘Stochastic Dominance ’ approach, we show how these decisions [...]

The article reports on the plan of the Israeli government to increase taxes imposed on oil and gas companies, based on recommendations made by a committee of public finance experts, headed by Eytan Sheshinski.

Abstract: Privatization has been a key component of structural reform programs in both developed and developing economies. The aim of such programs is to achieve higher microeconomic efficiency and foster economic growth, as well as reduce public sector borrowing requirements through the elimination of unnecessary subsidies. Microeconomic theory tells us that incentive and contracting problems create inefficiencies due to public ownership, given that managers of state-owned enterprises pursue objectives that differ from those of private firms (political view) and face less monitoring (management view). Not only are the managers ’ objectives distorted, but the budget constraints they face are also [...]