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Optimal Capital Taxation, Labour Unions, and the Hold-Up Problem

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  • Tapio Palokangas

Abstract

This document examines optimal capital taxation with wage-setting labour unions when the government taxes consumption, labour, and capital. The results are as follows. If unions can commit themselves to particular wages for a long period, then there is no hold-up problem. Otherwise, the hold-up problem creates a positive link from capital accumulation to the wage. The optimal labour subsidy is positive and greater in the presence than in the absence of the hold-up problem. The optimal capital subsidy is zero in the absence, but positive in the presence of the hold-up problem.

Suggested Citation

  • Tapio Palokangas, 2014. "Optimal Capital Taxation, Labour Unions, and the Hold-Up Problem," LABOUR, CEIS, vol. 28(4), pages 359-375, December.
    • Handle: RePEc:bla:labour:v:28:y:2014:i:4:p:359-375
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    File URL: http://hdl.handle.net/10.1111/labr.12041
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