Sin Licenses Revisited

51 Pages Posted: 5 Dec 2012

See all articles by Markus Haavio

Markus Haavio

Bank of Finland - Research

Kaisa Kotakorpi

University of Turku - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 30, 2012


We analyze attempts to implement personalized regulation in the form of sin licenses (O’Donoghue and Rabin 2003, 2005, 2007) to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account the possibility that consumers may trade the sin good in a secondary market, and show that sin licenses induce only sophisticated individuals with low levels of self-control problems to consume optimally. The consumption of naïve individuals as well as sophisticated individuals with severe self-control problems remains too high, and welfare in equilibrium is decreasing in the level of self-control problems and non-increasing in the level of naivete. Further, we show that introducing a uniform tax on top of a system of sin licenses may improve welfare, whereas a uniform maximum quota would reduce welfare for sophisticates but may increase welfare for naives. Finally, we show that naives would benefit from a scheme where sin licenses are sold for a positive price in the primary market.

Keywords: self-control problems, sin licenses, secondary markets

JEL Classification: H210, H300, I180

Suggested Citation

Haavio, Markus and Kotakorpi, Kaisa, Sin Licenses Revisited (November 30, 2012). CESifo Working Paper Series No. 4010, Available at SSRN: or

Markus Haavio

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki

Kaisa Kotakorpi (Contact Author)

University of Turku - Department of Economics ( email )


CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

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