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Title: Loans, bequests and taxes where abilities differ : a theoretical analysis using a two-ability model
Author: Allen, H. F.
ISNI:       0000 0001 3415 812X
Awarding Body: University of Oxford
Current Institution: University of Oxford
Date of Award: 1980
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Three problems that are associated with differences in abilities are investigated using a model with two ability groups. The first concerns the capital market. With differing abilities which cannot be identified, lenders are unable to predict borrowers' outputs and hence whether they will default or not. The penalty for default is assumed to be that borrowers are in future unable to obtain loans. To enforce contracts it is therefore necessary for the current payment to be less than the value of future access to the capital market. It is shown that this implies lenders should make the payment for borrowing a share in the output since this enables them to receive the maximum amount obtainable from each borrower without precipitating default. The second concerns the distribution of wealth and inheritance when there is an imperfect capital market. The only capital people can use is their own savings and inheritance; with differing abilities the productive capacity of the economy then depends on the distribution of wealth. One of the ability groups is much better than the other at organising production; they found, expand or maintain fortunes whereas the low ability individuals dissipate any inheritance they receive. The various types of equilibrium are categorised and the effect of inheritance taxation is considered. The latter is then compared with a wage tax. Either can plausibly be superior on the basis of the change in Rawlsian social welfare for a given yield. The final problem concerns the redistribution of income by taxation. It is argued that if differences in abilities lead to people supplying different types of labour which are combined together to produce output, the endogeneity of wages may make a considerable difference to optimal linear tax rates. In this case there is not only the usual redistribution via the fiscal system but also redistribution via the production function. These may be reinforcing or opposing. It is shown that in plausible cases the production effect may outweigh the fiscal so that net redistribution to the poor involves a wage subsidy financed by a lump sum tax.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: Economics & economic theory