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Temptation and taxation

Krusell, Per, Kuruşçu, B. and Smith, Anthony A. (2010) Temptation and taxation. Econometrica, 78 (6). pp. 2063-2084. ISSN 0012-9682

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Identification Number: 10.3982/ECTA8611

Abstract

We study optimal taxation when consumers have temptation and self-control problems. Embedding the class of preferences developed by Gul and Pesendorfer into a standard macroeconomic setting, we first prove, in a two-period model, that the optimal policy is to subsidize savings when consumers are tempted by “excessive” impatience. The savings subsidy improves welfare because it makes succumbing to temptation less attractive. We then study an economy with a long but finite horizon which nests, as a special case, the Phelps–Pollak–Laibson multiple-selves model (thereby providing guidance on how to evaluate welfare in this model). We prove that when period utility is logarithmic, the optimal savings subsidies increase over time for any finite horizon. Moreover, as the horizon grows large, the optimal policy prescribes a constant subsidy, in contrast to the well known Chamley–Judd result.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information: © 2010 The Econometric Society
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
Sets: Departments > Economics
Date Deposited: 11 Nov 2014 12:25
Last Modified: 20 May 2020 02:17
URI: http://eprints.lse.ac.uk/id/eprint/57243

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