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Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting

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  • Per Krusell
  • Burhanettin Kuruscu
  • Anthony A. Smtih, Jr.

Abstract

We consider a representative-agent equilibrium model where the consumer has quasi-geometric discounting and cannot commit to future actions. With restricted attention to a parametric class for preferences and technology--logarithmic utility, Cobb-Douglas production, and full depreciaiton--we solve for time-consistent competitive equilibria globally and explicitly. For this class, we characterize the welfare properties of competitive equilibria and compare them to that of a planning problem. The planner is a consumer representative who, without commitment but in a time-consistent way, maximizes his present-value utility subject to resources constraints. The competitive equilibrium results in strictly higher welfare than does the planning problem whenever the discounting is not geometric. We also explicitly consider taxation in our environment. With a benevolent government that can tax income and capital, but cannot commit its future tax rates, time-consistent taxation leads to positive tax rates on capital. These tax rates reproduce the central planning solution, and thus imply a worse outcome in welfare terms when there is no government.

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Bibliographic Info

Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2001-06.

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Handle: RePEc:cmu:gsiawp:515949340

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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Web: http://student-3k.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

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  1. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, 01.
  2. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  3. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
  4. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  5. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000. "Temptation and Taxation," GSIA Working Papers 2001-12, Carnegie Mellon University, Tepper School of Business.
  6. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
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