Component-Specific Versus Comprehensive Habits in a Model of Income and Consumption Taxation

Trinity College Department of Economics Working Paper No. TEP 14/2004

81 Pages Posted: 12 Mar 2008  

Constantin Gurdgiev

Trinity College, Dublin; Middlebury Institute of International Studies at Monterey (MIIS)

Date Written: December 2004

Abstract

This paper proposes a model of economy with weakly non-separable preferences for both work effort and consumption. Households who derive utility from consumption of a single commodity and leisure take into account the habitual dependency of their utility on both labour supply and consumption in the past. As a result, this model provides an analysis of the effects of labour income and consumption taxes increase on asset holdings, consumption and labour supply of households. The model of comprehensive habits is contrasted by the standard habits in consumption model that is extended to include endogenous labour supply decisions. We show that one of the main results of the model includes the possibility for using comprehensive habits to capture the simultaneous time persistency in the behaviour of both consumption and leisure demand. The model also yields results in capturing the possibility for either co-movement or counter-movement of the main choice variables in response to the exogenous tax policy change.

Keywords: Habits, Consumption, Leisure, Income Tax

JEL Classification: E10, E21, E62

Suggested Citation

Gurdgiev, Constantin, Component-Specific Versus Comprehensive Habits in a Model of Income and Consumption Taxation (December 2004). Trinity College Department of Economics Working Paper No. TEP 14/2004. Available at SSRN: https://ssrn.com/abstract=1105035 or http://dx.doi.org/10.2139/ssrn.1105035

Constantin Gurdgiev (Contact Author)

Trinity College, Dublin ( email )

Trinity College
Dublin 2

Middlebury Institute of International Studies at Monterey (MIIS) ( email )

460 Pierce St
Monterey, CA 93940
United States

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