Production Efficiency and Hidden Actions: A Mechanism Design Approach

with V.V. Chari, Adway De, and Keyvan Eslami

Abstract: We revisit the optimality of production efficiency and uniform commodity taxation within a full Mirrleesian framework with multiple goods. Instead of restricting the planner to particular taxes---linear or non-linear---as has been the focus of the multi-sector optimal taxation literature, we derive the optimal structure of tax instruments directly from primitive, informational constraints on a planner. If the distribution of types is continuous, then the constrained efficient allocations are production efficient and can be implemented as a competitive equilibrium with a non-linear income tax. This holds in models with fixed occupations or with occupational choice. Recent results that find optimal allocations to be production inefficient assume all workers within an occupation have identical productivities, an assumption we argue is not realistic for policy-makers looking at real-world occupations.