|
Optimal taxation under income uncertainty has been extensively developed
in expected utility theory, but it is still open for inseparable utility function
between income and e ort. As an alternative of decision-making under
uncertainty, prospect theory (Kahneman and Tversky (1979), Tversky and
Kah-neman (1992)) has been obtained empirical support, for example, Kahneman
and Tversky (1979), and Camerer and Lowenstein (2003). It is beginning to explore optimal taxation in the context of prospect theory, for example,
Oswald (1983), Tuomala (1990) in conventional setting without utility
interdependence, and Kanbur, Pirttila, and Tuomala (2008) for separable value
functions between income and effort. It is challenging in the prospect theory
to treat with optimal taxation for inseparable value function between income
and effort. In this paper, we model taxation under income uncertainty by
sufficiently considering government's risk aversion and individuals' loss
aversion. We obtain its sufficient condition for the first order approach to general
value functions including inseparable value function between income and
effort, hence generalizing Oswald (1983), Tuomala (1990) to optimal taxation
with utility interdependence, and Kanbur, Pirttila, and Tuomala (2008) to
inseparable value functions between income and effort.
|