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Habit Formation and Labour Supply

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Author Info
Cremer, Helmuth
De Donder, Philippe
Maldonado, Darío
Pestieau, Pierre

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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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6776.

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Date of creation: Apr 2008
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Handle: RePEc:cpr:ceprdp:6776

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Related research
Keywords: Habit formation Myopia Unretiring

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

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This page was last updated on 2008-8-19.

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