How Much can Taxation Alleviate Temptation and Self-Control Problems?

39 Pages Posted: 12 Sep 2010

See all articles by Per Krusell

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Burhanettin Kuruscu

University of Toronto - Department of Economics

Anthony A. Smith

Yale University - Cowles Foundation

Date Written: September 12, 2010

Abstract

We develop a quantitative dynamic general-equilibrium model where agents have preferences featuring temptation and self-control problems, and we apply it in order to understand to what extent standard investment/savings subsidies can improve welfare.

The dynamic model of preferences builds on the Gul-Pesendorfer setting and uses a “quasi-geometric” formulation for temptation, the strength of which is modeled with a separate parameter. When this parameter is infinity, consumers always succumb to the temptation, and our formulation reduces to the model of multiple selves studied elsewhere. We embed the consumer in the typical neoclassical growth setting used for macroeconomic analysis and demonstrate how steady states can be analyzed and how equilibria can be solved. We also propose a way of calibrating the model.

Our preference-based setting gives unequivocal guidance for policy analysis. In our quantitative application, we show that when preferences are such that self-control is limited and consumers instead mainly succumb to the temptation of overconsumption, policy can play an important role.

Suggested Citation

Krusell, Per L. and Kuruscu, Burhanettin and Smith, Anthony A., How Much can Taxation Alleviate Temptation and Self-Control Problems? (September 12, 2010). Available at SSRN: https://ssrn.com/abstract=1675961 or http://dx.doi.org/10.2139/ssrn.1675961

Per L. Krusell

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Burhanettin Kuruscu (Contact Author)

University of Toronto - Department of Economics ( email )

Toronto, Ontario M5S 3G8
Canada

HOME PAGE: http://https://sites.google.com/site/bkuruscu

Anthony A. Smith

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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