Workforce or Workfare?



Appendix

Proof of Proposition 1. As in Diamond (1980), the Lagrangian associated with the opti-
mal tax problem is

L(c(n), b, λ; r) =

n∙n    p

nm


`n



∙m* (c(n),b,r)

u


m(n)


ρm(n)

(c(n), m)f (m, n)dm +

m* (c(n),b,r)


-m*(c(n),b,r)


m(n)


u(b, r)f (m, n)dm dn


(A.1)


ρm(n)

[n - c(n)]f (m, n)dm -

m* (c(n),b,r)


bf (m, n)dm dn - R


The first-order condition with respect to c (n) yields:

∙m(n)


1


1 ∂u (c (n) , m)


m*(c(n),b,r) _


= [n - c(n) + b]


λ    ∂c (n)

∂m* (c (n) , b, r)
∂c (n)


f(m, n)dm


f (m*,n).


(A.2)


Using (5) and (6), and dividing both sides by F(m*,n), (A.2) can be rewritten as

1 „М -WWdm* (c(n) ,b,r) f (m*,n)

(A.3)


1 - g(n) = τ (n)      ■         Fm ■

From (A.3) we see that τ(n) takes the sign of 1 - g(n) as stated in Proposition 1.

The first-order condition with respect to r is

≤00, r 0 and r-τf- = 0.
∂r                ∂r

(A.4)


Differentiating (A.1) yields:

L ∂u (b, r)


∂r ∂r

Z

n n


?n pm(n)

f(m, n)dmdn

Jn Jm*(c(n),b,r)


n dm* (c (n) ,b,r)        AAW∕* W

----------------[n c (n) + b] f (m , n)dn.
∂r


(A.5)


By the Envelope Theorem, (A.5) provides the dW/dr that we display in (8).

13



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