Optimal wage redistribution in the presence of adverse selection in the labor market

In this paper we highlight a novel role played by the non-linear income tax in the presence of adverse selection in the labor market due to asymmetric information between workers and firms. Relying on the Rothschild and Stiglitz equilibrium concept, we show that an appropriate choice of the tax schedule enables the government to affect the wage distribution by controlling the transmission of information in the labor market. This represents an additional channel through which the government can foster the pursuit of its redistributive goals.