https://macropaperwarehouse.com/authors/wenjian-li/Wenjian LiHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/optimal-taxation-and-market-power/https://macropaperwarehouse.com/papers/optimal-taxation-and-market-power/<p>This paper asks whether and how optimal income taxation should change when firms have market power. The question is motivated by the documented rise in economy-wide markups since 1980, which has compressed the labor share, widened the gap between worker and entrepreneurial income, and generated allocative inefficiency through excessive pricing.</p> <p>The authors develop a Mirrleesian optimal taxation framework augmented with three features absent from the canonical literature: (i) oligopolistic intermediate goods markets with endogenous, variable markups, (ii) heterogeneous firm productivities, and (iii) two occupational groups—wage-earning workers and profit-earning entrepreneurs—whose abilities are private information. Entrepreneurs strategically set prices under Cournot competition, which means that the tax system affects profits both through a firm&rsquo;s own behavior and through the responses of its competitors. This strategic interaction is the critical novelty relative to prior work that assumes monopolistic competition.</p>