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OPTIMAL TAXATION AND SOCIAL NETWORKS

Published online by Cambridge University Press:  21 June 2013

Marcelo Arbex  and
Dennis O'Dea
Marcelo Arbex*
Affiliation:
University of Windsor
Dennis O'Dea
Affiliation:
University of Washington
*
Address correspondence to: Marcelo Arbex, Department of Economics, University of Windsor, 401 Sunset Avenue, Windsor, Ontario N9B 3P4, Canada; e-mail: arbex@uwindsor.ca.
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Abstract

We study optimal taxation when jobs are found through a social network. The network determines employment, which workers may influence by engaging in social activities. The network parameters play an important role in determining the economy's employment level and the optimal income tax. The optimal labor income tax depends on both the traditional intensive margin of labor supply and a new extensive margin that depends on the structure of the social network. Social activities that promote social connections are instrumental to acquiring job information; taxation thus discourages both social activities and labor supply, reducing employment. Labor taxes vary positively with labor supply and negatively with employment. When networking is absent, taxes are higher and the economy's employment rate is lower. The optimal capital tax rate is zero, independent of labor market frictions. Social networking reduces job search frictions and is welfare-enhancing.

Keywords

Optimal TaxationSocial NetworksLabor Markets
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 8 , December 2014 , pp. 1683 - 1712
Copyright
Copyright © Cambridge University Press 2013 

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