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Tagging With Leisure Needs

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Executive Summary

The authors study optimal redistributive taxes when individuals differ in two characteristics - earning ability and leisure needs - assumed to be imperfectly correlated. Individuals have private information about their abilities but needs are observable. With two different levels of observable needs the population can be separated into two groups and needs may be used as a tag. They assume that the social planner considers individuals should be compensated for their leisure needs and characterize the optimal redistributive policy, and the extent of compensation for needs, with tagging. They also consider an alternative social objective in which individuals are deemed responsible for their needs.

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