James Mirrlees and William Vickrey
Citation: For their fundamental contributions to the economic theory of incentives under asymmetric information.
The key idea
Optimal taxation when income depends on effort the government can't observe (Mirrlees). Auctions when bidders' valuations are private (Vickrey).
The explanation
Mirrlees solved the optimal-income-tax problem when individuals' productivities are private information: a smooth tax schedule with marginal rates not necessarily increasing throughout. Vickrey designed the second-price sealed-bid auction (1961) — bidders truthfully reveal valuations because the price they pay if they win is the next-highest bid.
Why Africa should care
Mirrlees-style optimal taxation guides debates about Kenya's PAYE schedule, South Africa's tax brackets, and the trade-off between progressivity and labour supply across the continent. Vickrey auctions are the basis of the digital advertising auctions that fund Kenya's online economy and the spectrum auctions used by national communications authorities.
How to use it
When designing a tax or transfer schedule, frame it as a mechanism-design problem: what private information needs to be elicited, and what incentive-compatibility constraints does this create?
Canonical works
- James A. Mirrlees (1971) "An Exploration in the Theory of Optimum Income Taxation" Review of Economic Studies
- William Vickrey (1961) "Counterspeculation, Auctions, and Competitive Sealed Tenders" Journal of Finance
More from Information, finance, and development · 1990-1999
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- 1993Robert Fogel and Douglass North
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