Commodity Taxation and Social Insurance

Abstract

We investigate optimal commodity taxation in a social insurance framework based on Varian (1980). We show that the tax prescriptions in this moral hazard framework are notably similar to those derive<! from models based on Mirrlees' (1971) self-selection framework. In particular, Atkinson and Stiglitz's (1976) results on uniform commodity taxation are valid in this setup. We incorporate pre-committed goods - those whose consumption must be decided before the resolution of uncertainty - and show that tax prescriptions are also analogous to the existing literature. The robustness of tax rules across these setups is explained by the relaxation of incentive compatibility constraints.