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Positional Concerns with Multiple Reference Points: Optimal Income Taxation and Public Goods in an OLG Model

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Author Info
Aronsson, Thomas () (Department of Economics, Umeå University)
Johansson-Stenman, Olof () (Department of Economics, School of Business, Economics and Law, Göteborg University)

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Abstract

This paper concerns optimal income taxation and provision of a state-variable public good under asymmetric information in a two-type overlapping generations model, where people care about their relative consumption. Each individual may compare his/her own current consumption with his/her own past consumption as well as with other people’s current and past consumption. The appearance of positional concerns affects the policy choices via two channels: (i) the size of the average degree of positionality and (ii) positionality differences between the (mimicked) low-ability type and the mimicker. Under plausible empirical estimates, the marginal labor income tax rates become substantially larger, and the absolute value of the marginal capital income tax rate of the low-ability type becomes substantially smaller, compared to the conventional optimal income tax model. The extent by which the rule for public provision should be modified depends crucially on the preference elicitation format.

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Publisher Info
Paper provided by Göteborg University, Department of Economics in its series Working Papers in Economics with number 304.

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Length: 50 pages
Date of creation: 19 May 2008
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Handle: RePEc:hhs:gunwpe:0304

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Postal: Department of Economics, School of Business, Economics and Law, Göteborg University Box 640, SE 405 30 GÖTEBORG, Sweden
Phone: 031-773 10 00
Web page: http://www.handels.gu.se/econ/
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Related research
Keywords: Optimal income taxation; asymmetric information; public goods; relative consumption; status; positional goods.;

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Find related papers by JEL classification:
D62 - Microeconomics - - Welfare Economics - - - Externalities
H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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  1. Aronsson, Thomas & Johansson-Stenman, Olof, 2008. "When the Joneses' consumption hurts: Optimal public good provision and nonlinear income taxation," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 986-997, June. [Downloadable!] (restricted)
  2. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
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  3. Andrew B. Abel, 2005. "Optimal Taxation when Consumers Have Endogenous Benchmark Levels of Consumption," Review of Economic Studies, Blackwell Publishing, vol. 72(1), pages 21-42, 01. [Downloadable!] (restricted)
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  4. Easterlin, Richard A, 2001. "Income and Happiness: Towards an Unified Theory," Economic Journal, Royal Economic Society, vol. 111(473), pages 465-84, July. [Downloadable!] (restricted)
  5. Frank, Robert H, 1985. "The Demand for Unobservable and Other Nonpositional Goods," American Economic Review, American Economic Association, vol. 75(1), pages 101-16, March. [Downloadable!] (restricted)
  6. Robin Boadway & Michael Keen, 1991. "Public Goods, Self-Selection and Optimal Income Taxation," Working Papers 828, Queen's University, Department of Economics.
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  7. Oswald, Andrew J., 1983. "Altruism, jealousy and the theory of optimal non-linear taxation," Journal of Public Economics, Elsevier, vol. 20(1), pages 77-87, February. [Downloadable!] (restricted)
  8. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March. [Downloadable!] (restricted)
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  9. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June. [Downloadable!] (restricted)
  10. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May. [Downloadable!] (restricted)
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  11. Stern, Nicholas, 1982. "Optimum taxation with errors in administration," Journal of Public Economics, Elsevier, vol. 17(2), pages 181-211, March. [Downloadable!] (restricted)
  12. Ordover, J. A. & Phelps, E. S., 1979. "The concept of optimal taxation in the overlapping-generations model of capital and wealth," Journal of Public Economics, Elsevier, vol. 12(1), pages 1-26, August. [Downloadable!] (restricted)
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