Optimal Redistributive Taxation in Credit Markets with Adverse Selection

Abstract : I study optimal redistributive taxation in credit markets with adverse selection. Under symmetric information, the tax system is non-distortionary and unambiguously benefits high-risk types at the expense of low-risk types. Under asymmetric information, a range of taxes exists that creates Pareto improvements relative to the (zero-tax) market allocation by increasing aggregate investment. For sufficiently high taxes, an increase in the safe interest rate can be accompanied by an increase in investment.