Essays on optimal feasible taxation

by 1970- Rhee, Byungchae

In the first essay, we study the following question: If the provision of public good is financed by property (wealth or endowment) taxes, what is the optimal tax mechanism when agents have private information about his own endowment? Employing the state-dependent implementation model, under incentive compatibility and feasibility constraints, we provide the full characterization of an optimal tax mechanism with two agents and its properties. Some interesting comparative statics analyses are also provided. For the general n-agent case, some partial characterization results are obtained. In addition, we fully characterize the optimal tax mechanism for the corresponding infinitely large economy. The main goal of the second essay is to extend the model of the first essay to a heterogeneous economy in which agents have some different wealth characteristics that are publicly observable, e.g., race. Using the same analysis as in the first essay where a homogeneous economy is studied, we provide the full characterization of an optimal tax mechanism for such a heterogeneous economy with two agents and its properties. In addition to the similar results in the first essay, we find that if the level of low endowment is low enough, only the incentive compatibility constraint of a minority agent is binding. The third essay studies the optimal formation of local public good economies and the immigration incentive of an agent. Using the characterizations of optimal tax mechanisms in the first and second essays, we compare the social welfare between homogeneous formation for which each local community consists of agents with same observable characteristics, e.g., race, and heterogeneous formation for which each local community consists of agents with different observable characteristics. The comparison shows that if the expected endowment of the economy is low enough, homogeneous formation is optimal, while otherwise heterogeneous formation is optimal. We also study the immigration incentive and find that a minority (resp. majority) agent will choose a heterogeneous (resp. homogeneous) formation regardless of his endowment. iii