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Habit Formation and Labor Supply

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Author Info

  • Helmuth Cremer
  • Philippe De Donder
  • Darío Maldonado
  • Pierre Pestieau

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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2008/wp-cesifo-2008-07/cesifo1_wp2351.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 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;

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References

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  1. 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.
  2. Hammond, Peter & Myles, Gareth (ed.), 2000. "Incentives, Organization, and Public Economics: Papers in Honour of Sir James Mirrlees," OUP Catalogue, Oxford University Press, number 9780199242290.
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Cited by:
  1. Matti Tuomala & Sanna Tenhunen, 2013. "On the design of an optimal non-linear tax/pension system with habit formation," International Tax and Public Finance, Springer, vol. 20(3), pages 485-512, June.
  2. Ricky Kanabar, 2012. "Unretirement in England: An empirical perspective," Discussion Papers 12/31, Department of Economics, University of York.

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