Adaptation, Anticipation-Bias and Optimal Income Taxation
AbstractAdaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt. This leads individuals to make inefficient intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation-biases in a framework where consumers adapt to earlier consumption levels through a habit-formation process. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. Our results show how a paternalistic government may correct for the effects of anticipation-bias through a combination of time-variant marginal labor income taxes and savings subsidies. Furthermore, the optimal policy mix remains the same, irrespective of whether consumers commit to their original life-time plan for work hours and savings decided upon in the first period of life or re-optimize later on when realizing the failure to adapt.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3840.
Date of creation: 2012
Date of revision:
optimal taxation; adaptation; habit-formation; anticipation-bias; paternalism;
Other versions of this item:
- Aronsson, Thomas & Schöb, Ronnie, 2012. "Adaptation, Anticipation-Bias and Optimal Income Taxation," UmeÃ¥ Economic Studies 842, Umeå University, Department of Economics.
- Aronsson, Thomas & Schöb, Ronnie, 2012. "Adaptation, Anticipation-bias and optimal income taxation," Discussion Papers 2012/13, Free University Berlin, School of Business & Economics.
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
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