Advertisement

Pareto-improving tax policies under hyperbolic discounting

  • Minwook Kang
Article
  • 11 Downloads

Abstract

This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted intertemporal utilities, but also exponentially discounted commitment utilities. This finding implies that both consumers and the government can have incentives to adopt tax policies against present-biased decisions. All the results are shown in a three-period model with general utility and production functions. A steady-state analysis indicates that the proposed tax policy is effective in recovering the welfare/capital loss due to consumers’ present bias.

Keywords

Present bias Hyperbolic discounting Pareto-improving tax policies Long-term perspective preferences Steady-state analysis 

JEL Classification

E03 E21 H21 

References

  1. Ainslie, G., & Haendel, V. (1983). The motives of the will. In T. S. E. Gottheil, K. Druley, & H. Waxman (Eds.), Etiologic aspects of alcohol and drug abuse. Charles C. Thomas: Springfield, IL.Google Scholar
  2. Akerlof, G. A. (1991). Procrastination and obedience. American Economic Review, 81(2), 1–19.Google Scholar
  3. Andersen, T. M., & Bhattacharya, J. (2011). On myopia as rationale for social security. Economic Theory, 47(1), 135–158.Google Scholar
  4. Angeletos, G.-M., Laibson, D., Repetto, A., Tobacman, J., & Weinberg, S. (2001). The hyperbolic consumption model: Calibration, simulation, and empirical evaluation. Journal of Economic Perspectives, 15(3), 47–68.Google Scholar
  5. Benzion, U., Rapoport, A., & Yagil, J. (1989). Discount rates inferred from decisions: An experimental study. Management Science, 35(3), 270–284.Google Scholar
  6. Bisin, A., Lizzeri, A., & Yariv, L. (2015). Government policy with time inconsistent voters. American Economic Review, 105(6), 1711–1737.Google Scholar
  7. Caliendo, F., & Findley, T. S. (2014a). Commitment, welfare, and the frequency of choices (Working paper)Google Scholar
  8. Caliendo, F. N., & Findley, T. S. (2014b). Discount functions and self-control problems. Economics Letters, 122(3), 416–419.Google Scholar
  9. Chade, H., Prokopovych, P., & Smith, L. (2008). Repeated games with present-biased preferences. Journal of Economic Theory, 139(1), 157–175.Google Scholar
  10. Chamley, C. (1986). Optimal taxation of capital income in general equilibrium with infinite lives. Econometrica, 54(3), 607–622.Google Scholar
  11. DellaVigna, & Malmendier, (2004). Contract design and self-control: Theory and evidence. Quarterly Journal of Economics, 119(2), 353–402.Google Scholar
  12. Diamond, P., & Köszegi, B. (2003). Quasi-hyperbolic discounting and retirement. Journal of Public Economics, 87(9), 1839–1872.Google Scholar
  13. Diamond, P. A. (1965). National debt in a neoclassical growth model. American Economic Review, 55(5), 1126–1150.Google Scholar
  14. Frederick, S., Loewenstein, G., & O’Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40(2), 351–401.Google Scholar
  15. Gilpatric, S. M. (2008). Present-biased preferences, self-awareness and shirking. Journal of Economic Behavior & Organization, 67(3), 735–754.Google Scholar
  16. Goldman, S. M. (1979). Intertemporally inconsistent preferences and the rate of consumption. Econometrica, 47(3), 621–626.Google Scholar
  17. Grenadier, S. R., & Wang, N. (2007). Investment under uncertainty and time-inconsistent preferences. Journal of Financial Economics, 84(1), 2–39.Google Scholar
  18. Gul, F., & Pesendorfer, W. (2001). Temptation and self-control. Econometrica, 69(6), 1403–1435.Google Scholar
  19. Gul, F., & Pesendorfer, W. (2004a). Self-control and the theory of consumption. Econometrica, 72(1), 119–158.Google Scholar
  20. Gul, F., & Pesendorfer, W. (2004b). Self-control, revealed preference and consumption choice. Review of Economic Dynamics, 7(2), 243–264.Google Scholar
  21. Gul, F., & Pesendorfer, W. (2005). The revealed preference theory of changing tastes. Review of Economic Studies, 72(2), 429–448.Google Scholar
  22. Guo, J.-T., & Krause, A. (2015). Dynamic nonlinear income taxation with quasi-hyperbolic discounting and no commitment. Journal of Economic Behavior & Organization, 109, 101–119.Google Scholar
  23. Guo, N. L., & Caliendo, F. N. (2014). Time-inconsistent preferences and time-inconsistent policies. Journal of Mathematical Economics, 51, 102–108.Google Scholar
  24. Judd, K. L. (1985). Redistributive taxation in a simple perfect foresight model. Journal of Public Economics, 28(1), 59–83.Google Scholar
  25. Kang, M. (2015). Welfare criteria for quasi-hyperbolic time preferences. Economics Bulletin, 35(4), 2506–2511.Google Scholar
  26. Kirby, K. N. (1997). Bidding on the future: Evidence against normative discounting of delayed rewards. Journal of Experimental Psychology: General, 126(1), 54.Google Scholar
  27. Krusell, P., Kuruşçu, B., & Smith, A. A. (2002a). Equilibrium welfare and government policy with quasi-geometric discounting. Journal of Economic Theory, 105(1), 42–72.Google Scholar
  28. Krusell, P., Kuruşçu, B., & Smith, A. A. (2002b). Time orientation and asset prices. Journal of Monetary Economics, 49(1), 107–135.Google Scholar
  29. Krusell, P., Kuruşçu, B., & Smith, A. A. (2010). Temptation and taxation. Econometrica, 78(6), 2063–2084.Google Scholar
  30. Kumru, Ç. S., & Thanopoulos, A. C. (2008). Social security and self control preferences. Journal of Economic Dynamics and Control, 32(3), 757–778.Google Scholar
  31. Laibson, D. (1996). Hyperbolic discount functions, undersaving, and savings policy (p. pp.). Cambridge: National Bureau of Economic Research.Google Scholar
  32. Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112(2), 443–477.Google Scholar
  33. Laibson, D., Repetto, A., & Tobacman, J. (2007). Estimating discount functions with consumption choices over the lifecycle. Cambridge: National Bureau of Economic Research.Google Scholar
  34. Loewenstein, G. (1987). Anticipation and the valuation of delayed consumption. Economic Journal, 97(387), 666–684.Google Scholar
  35. Loewenstein, G., & Prelec, D. (1992). Anomalies in intertemporal choice: Evidence and an interpretation. Quarterly Journal of Economics, 107(2), 573–597.Google Scholar
  36. Myerson, J., Green, L., & Warusawitharana, M. (2001). Area under the curve as a measure of discounting. Journal of the Experimental Analysis of Behavior, 76(2), 235–243.Google Scholar
  37. Nakajima, M. (2012). Rising indebtedness and temptation: A welfare analysis. Quantitative Economics, 3, 257–288.Google Scholar
  38. O’Donoghue, T., & Rabin, M. (1999). Doing it now or later. American Economic Review, 89(1), 103–124.Google Scholar
  39. O’Donoghue, T., & Rabin, M. (2001). Choice and procrastination. Quarterly Journal of Economics, 116(1), 121–160.Google Scholar
  40. O’Donoghue, T., & Rabin, M. (2003). Studying optimal paternalism, illustrated by a model of sin taxes. American Economic Review, 93(2), 186–191.Google Scholar
  41. O’Donoghue, T., & Rabin, M. (2006). Optimal sin taxes. Journal of Public Economics, 90(10), 1825–1849.Google Scholar
  42. O’Donoghue, T., & Rabin, M. (2015). Present bias: Lessons learned and to be learned. American Economic Review: Papers and Proceedings, 105(5), 273–79.Google Scholar
  43. Pavoni, N., & Yazici, H. (2017). Optimal life-cycle capital taxation under self-control problems. Economic Journal, 127(602), 1188–1216.Google Scholar
  44. Phelps, E. S., & Pollak, R. A. (1968). On second-best national saving and game-equilibrium growth. Review of Economic Studies, 35(2), 185–199.Google Scholar
  45. Rachlin, H., Raineri, A., & Cross, D. (1991). Subjective probability and delay. Journal of the Experimental Analysis of Behavior, 55(2), 233.Google Scholar
  46. Salanié, F., & Treich, N. (2006). Over-savings and hyperbolic discounting. European Economic Review, 50(6), 1557–1570.Google Scholar
  47. Samuelson, P. A. (1975). Optimum social security in a life-cycle growth model. International Economic Review, 16(3), 539–544.Google Scholar
  48. Strotz, R. H. (1956). Myopia and inconsistency in dynamic utility maximization. Review of Economic Studies, 23(3), 165–180.Google Scholar
  49. Thaler, R. (1981). Some empirical evidence on time inconsistency. Review of Economic Studies, 23, 165–180.Google Scholar
  50. Yılmaz, M. (2013). Repeated moral hazard with a time-inconsistent agent. Journal of Economic Behavior & Organization, 95, 70–89.Google Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Division of Economics, School of Social SciencesNanyang Technological UniversitySingaporeSingapore

Personalised recommendations