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Sin Licenses Revisited

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  • Markus Haavio
  • Kaisa Kotakorpi

Abstract

We analyse attempts to implement personalised 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.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2012/wp-cesifo-2012-11/cesifo1_wp4010.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4010.

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Date of creation: 2012
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Handle: RePEc:ces:ceswps:_4010

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

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  1. Eliaz, Kfir & Spiegler, Ran, 2004. "Contracting with Diversely Naive Agents," CEPR Discussion Papers 4573, C.E.P.R. Discussion Papers.
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  5. Markus Haavio & Kaisa Kotakorpi, 2009. "The Political Economy of Sin Taxes," CESifo Working Paper Series 2650, CESifo Group Munich.
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