Optimal Redistribution with Unobservable Disability: Welfarist Versus Non-Welfarist Social Objectives

Abstract

This paper examines the optimal non linear income and commodity tax when the same labor disutility can receive two alternative interpretations, taste for leisure and disability, but the disability is not readily observable. We compare the optimal policy under alternative social objectives, welfarist and non-welfarist, and conclude that the non-welfarist objective, in which the planner gives a higher weight to the disutility of labour of the disabled individuals, is the only reasonable specification. It has some foundation in the theory of responsibility; further, unlike the other specifications it yields an optimal solution that may involve a lower labour supply requirement from disabled individuals.

Keywords: Optimal non-linear taxation, quasi-linear preferences, asymmetric information, responsibility

JEL Classification: H21, H41