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Internalities and Paternalism: Applying the Compensation Criterion to Multiple Selves across Time

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  • Eric Rasmusen

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

One reason to call an activity a vice and suppress it is that it reduces a person’s future happiness more than it increases his present happiness. Gruber and Koszegi (2001) show how a vice tax can increase a person’s welfare in a model of multiple selves with hyperbolic preferences across time. The present paper shows that an interself analogy of the Kaldor-Hicks compensation criterion can justify a vice ban whether preferences are hyperbolic or exponential, but subject to the caveat that the person has a binding constraint on borrowing.

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File URL: http://www.bus.indiana.edu/riharbau/RePEc/iuk/wpaper/bepp2008-13-rasmusen.pdf
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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2008-13.

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Date of creation: Oct 2008
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Handle: RePEc:iuk:wpaper:2008-13

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Keywords: internalities; sin tax; moral regulation; Kaldor-Hicks criterion; time inconsistency; hyperbolic preferences;

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  1. Harris, Christopher & Laibson, David, 2001. "Dynamic Choices of Hyperbolic Consumers," Econometrica, Econometric Society, vol. 69(4), pages 935-57, July.
  2. Andrew Caplin & John Leahy, 2004. "The Social Discount Rate," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1257-1268, December.
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  5. Eric Rasmusen, 2008. "Some Common Confusions about Hyperbolic Discounting," Working Papers 2008-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
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  13. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
  14. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  15. Ahmed Khwaja & Dan Silverman & Frank Sloan, 2006. "Time Preference, Time Discounting, and Smoking Decisions," NBER Working Papers 12615, National Bureau of Economic Research, Inc.
  16. Baltagi, Badi H & Levin, Dan, 1986. "Estimating Dynamic Demand for Cigarettes Using Panel Data: The Effects of Bootlegging, Taxation and Advertising Reconsidered," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 148-55, February.
  17. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
  18. Jay Bhattacharya & Darius Lakdawalla, 2004. "Time-Inconsistency and Welfare," NBER Working Papers 10345, National Bureau of Economic Research, Inc.
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