Labour and Public Policy Seminar: Arnaud Dupuy, University of Luxembourg

Title: On the incidence of taxation in matching markets

2017.02.03 | Bodil Westermann Krog

Date Fri 07 Apr
Time 12:15 13:00
Location Fuglesangs Allé 4, 8210 Aarhus V, building 2621(B), room 04

Speaker: Arnaud Dupuy, CREA, University of Luxembourg

Title: On the incidence of taxation in matching markets

Abstract: We analyze the effects of taxation in two-sided matching markets. In these markets, welfare depends not only on the set of agents who are matched in equilibrium, but on the assignment of agents to match partners. Consequently, taxes can generate inefficiency on the allocative margin by changing who is matched to whom, even if the number of workers at each firm is unafftected. Moreover, taxable income is not a sufficient indicator of the deadweight loss of taxation because it does not capture changes in firms' surplus. For markets in which workers refuse to match without a positive wage, the allocative inefficiency is weakly decreasing in the tax rate. However, in marriage markets, where transfers may flow in both directions, or in student-college matching markets where tuition fees may coexist with scholarships, the allocative inefficiency of taxation may not be monotonic in the level of the tax or transfer friction. We show how a renormalization allows for an equivalence between a market with taxation and a market without taxation with adjusted match values. This equivalence is used to show additional properties of matching markets with taxation and to adapt existing econometric methods to markets with taxation. Using data from the Division I Football Bowl Subdivision (FBS) of the National Collegiate Athletic Association (NCAA), we then estimate the preferences in the college-coach matching market and show that the true deadweight loss can differ dramatically from that measured without accounting for the preference heterogeneity of the matching market. In addition to highlighting the potential for allocative distortions from taxation, our model provides a continuous link between canonical models of matching with and without transfers.

Organizer: Niels Skipper

Labour and Public Policy Seminars