Factor income taxation and growth under asymmetric information

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)775-789
Journal / PublicationJournal of Public Economics
Issue number3-4
Publication statusPublished - Apr 2007


This paper studies the growth effects of factor income taxation on capital and labor in an endogenous growth model with overlapping generations. Capital accumulation in our model takes place through credit-financed investments in a market with asymmetric information between lenders and borrowers. We show that, in the presence of asymmetric information, capital income taxation worsens the adverse selection problem in the credit market, which in turn introduces an additional adverse effect on growth. In so doing, our analysis provides a new argument in favor of a lower (higher) capital (labor) income taxation in funding public expenditures. © 2006 Elsevier B.V. All rights reserved.

Research Area(s)

  • Asymmetric information, Factor income taxation, Growth