2015/09/01 by Emmanuel Farhi, Xavier Gabaix · 1 citation
Economics, Econometrics and Finance · Social Sciences · Business, Management and Accounting · #Fiscal Policy and Economic Growth #Gender, Labor, and Family Dynamics #Financial Literacy, Pension, Retirement Analysis #Economics #Microeconomics #Mathematical economics
paper · pdf · doi:10.3386/w21524
openalex publication_date 2015/09/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/06/11
This paper develops a theory of optimal taxation with behavioral agents. We use a general behavioral framework that encompasses a wide range of behavioral biases such as misperceptions, internalities and mental accounting. We revisit the three pillars of optimal taxation: Ramsey (linear commodity taxation to raise revenues and redistribute), Pigou (linear commodity taxation to correct externalities) and Mirrlees (nonlinear income taxation). We show how the canonical optimal tax formulas are modified and lead to a rich set of novel economic insights. We also show how to incorporate nudges in the optimal taxation frameworks, and jointly characterize optimal taxes and nudges. We explore the Diamond-Mirrlees productive efficiency result and the Atkinson-Stiglitz uniform commodity taxation proposition, and find that they are more likely to fail with behavioral agents.