TY  - JOUR
AU  - Luttmer,Erzo F.P.
AU  - Zeckhauser,Richard J.
TI  - Schedule Selection by Agents: from Price Plans to Tax Tables
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13808
PY  - 2008
Y2  - February 2008
UR  - http://www.nber.org/papers/w13808
L1  - http://www.nber.org/papers/w13808.pdf
N1  - Author contact info:
Erzo F.P. Luttmer
6106 Rockefeller Center, Room 305
Department of Economics
Dartmouth College
Hanover, NH 03755
Tel: 603/646-6479
E-Mail: Erzo.FP.Luttmer@Dartmouth.Edu

Richard J. Zeckhauser
John F. Kennedy School of Government
Harvard University
79 John F. Kennedy Street
Cambridge, MA  02138
Tel: 617/495-1174
Fax: 617/384-9340
E-Mail: richard_zeckhauser@harvard.edu
AB  - Requiring agents with private information to select from a menu of incentive schedules can yield efficiency gains.  It will do so if, and only if, agents will receive further private information after selecting the incentive schedule but before taking the action that determines where on the incentive schedule they end up.  We argue that this information structure is relevant in many applications. We develop the theory underlying optimal menus of non-linear schedules and prove that there exists a menu of schedules that offers a strict first-order interim Pareto improvement over the optimal single non-linear schedule.  We quantify the gains from schedule selection in two settings.  The first is a stylized example of a monopolistic utility company increasing profits by offering a menu of price plans.  The second is a simulation based on U.S. earnings data, which shows that moving to a tax system that allows individuals to choose their tax schedule increases social welfare by the same amount as would occur from a 4.0 percent windfall gain in the government budget (or about $600 per filer per year).  The resulting reduction in distortions accounts for about two thirds of the increase in social welfare while the remainder comes from an increase in redistribution.
ER  -