Output taxation by a revenue-raising government under signaling

In this paper the behavior of a tax-collecting government (a tax office) when imposing a quantity-tax to firms is analyzed along a two-period signaling model. Each taxpayer privately knows its technological attributes, while third parties—the tax office among them—have only a prior belief about this fact, so firms can be tempted to behave opportunistically. In monopoly, signaling is always costly in terms of output deviation and the tax office reacts by setting, a smaller tax in (asymmetric information) period 1 than it would under symmetric information. In oligopoly, signaling can be either costly or costless. In the former case, the tax imposed by the tax office to each firm is below that imposed under symmetric information, while it is equal in the latter case. Besides, fiscal revenue under signaling is unambiguously lower than under symmetric information, even when tax size is the same in both contexts. Finally, it is shown that signaling (and the resulting tax office behavior upon tax setting) may lead to greater social welfare than under symmetric information either in monopoly or oligopoly markets