Signaling and Indirect Taxation

Abstract

Commodities communicate. We investigate optimal indirect taxation when both the intrinsic qualities of goods and signaling motivate consumption choices. Optimal indirect taxes are introduced into a monotonic signaling game. We provide sufficient conditions for the uniqueness of the D1 sequential equilibrium strate- gies. In the case of pure costly signaling, signaling goods can in equilibrium be taxed without burden. When commodities serve both intrinsic consumption and signaling, optimal taxes are characterized by a Ramsey rule, which deals with distortions resulting from signaling.