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Optimal Life-cycle Capital Taxation under Self-Control Problems

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  • Nicola Pavoni
  • Hakki Yazici

Abstract

We study optimal taxation of savings in an economy where agents face self-control problems and are allowed to be partially naive. We assume that the severity of self-control problems changes over the life-cycle. We focus on quasihyperbolic discounting with constant elasticity of intertemporal substitution utility functions and linear Markov equilibria. We derive explicit formulas for optimal taxes that implement the efficient allocation. We show that if agents’ ability to self-control increases concavely with age, then savings should be subsidized and the subsidy should decrease with age. We also show that allowing for age-dependent self-control problems creates large effects on the level of optimal subsidies, while optimal taxes are not very sensitive to the level of sophistication. JEL classification: E21, E62, D03. Keywords: Self-control problems, Linear Markov equilibrium, Life cycle taxation of savings.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 467.

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Date of creation: 2012
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Handle: RePEc:igi:igierp:467

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  1. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  2. Per Krusell & Burhanettin Kuruscu & Anthony A. Smtih, Jr., . "Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting," GSIA Working Papers 2001-06, Carnegie Mellon University, Tepper School of Business.
  3. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April.
  4. John Ameriks & Andrew Caplin & John Leahy & Tom Tyler, 2007. "Measuring Self-Control Problems," American Economic Review, American Economic Association, vol. 97(3), pages 966-972, June.
  5. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
  6. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-72, June.
  7. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  1. When kids are impatient: subsidize their savings
    by Economic Logician in Economic Logic on 2013-02-04 15:37:00

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