THE TAX THEY PAY MAY BE YOUR OWN - PROMOTION, TAXES AND LABOR SUPPLY

A model of labour supply is formulated in which increased effort resul ts in an increase in the probability of promotion. A simple benchmark model is extended in two directions. The first emphasizes the link bet ween labour supply and saving decisions. The other takes account of th e interaction between workers via contests for promotion. A general in sight that emerges from the analysis is that when studying the effects of wages and taxes on incentives to work, it is sometimes the after-t ax incomes of other workers - in particular senior workers who have al ready been promoted - which are of crucial importance.