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Habit Formation and Labor Supply

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Author Info
Helmuth Cremer ()
Philippe de Donder ()
Darío Maldonado ()
Pierre Pestieau ()

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Abstract

This paper shows that the combination of habit formation - present consumption creating additional consumption needs in the future - and myopia may explain why some retirees are forced to ‘unretire’, i.e., unexpectedly return to work. It also shows that when myopia about habit formation leads to unretirement there is a case for government's intervention. In a first-best setting the optimal solution can be decentralized by a simple ‘Pigouvian’ (paternalistic) consumption tax (along with suitable lump-sum taxes). In a second-best setting, when personalized lump-sum transfers are not available, consumption taxes may have conflicting paternalistic and redistributive effects. We study the design of consumption taxes in such a setting when myopic individuals differ in productivity.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2351.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2351

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Related research
Keywords: habit formation; myopia; unretiring;

Other versions of this item:

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

References listed on IDEAS
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  1. Fehr, Ernst & Zych, Peter K., 2008. "Intertemporal Choice under Habit Formation," Handbook of Experimental Economics Results, Elsevier. [Downloadable!] (restricted)
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  2. Jean-Marie Lozachmeur, 2006. "Optimal Age-Specific Income Taxation," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(4), pages 697-711, October. [Downloadable!] (restricted)
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This page was last updated on 2009-12-14.

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