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Income taxation and job creation

Published online by Cambridge University Press:  16 March 2023

Johanna Röhrs
Johanna Röhrs*
Affiliation:
University of Regensburg, Regensburg, Germany
*
Email: johanna.roehrs@ur.de
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Abstract

This paper augments the DMP model with large firms and intrafirm wage bargaining by an endogenous decision to become an entrepreneur that is based on heterogeneous entrepreneurial abilities. If workers’ wage bargaining power is not too large and the match efficiency is not too low, the decentralized market equilibrium features an inefficiently high number of entrepreneurs, because they appropriate large parts of the surplus from matches. A realistic calibration with empirically plausible parameters shows this case to be the relevant one. Consequently, introducing a tax on the profits of entrepreneurs restores the constrained first-best allocation by affecting occupational choices. It drives rather unproductive entrepreneurs out of the market since the marginal entrepreneur is affected and not the average one. Thus, the negative effects on job creation are small.

Keywords

Optimal taxationimperfect labor marketsjob creationentrepreneurship
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 8 , December 2023 , pp. 2056 - 2085
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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