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Present-Biased Individuals, Optimal Paternalism, and Transfers in Kind

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  • Jes Winther Hansen

    (Department of Economics, University of Denmark)

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    Abstract

    Present-biased preferences cause distortions in consumption that can motivate the use of paternalistic in-kind transfers. Empirically, goods are consumed to different degrees when consumption outlay changes. Economists distinguish between necessary goods and luxury goods. A present-biased individual has an intertemporal distortion of consumption toward the present, which in turn distorts present consumption toward luxury goods. In-kind transfers of necessary goods, such as food stamps, can alleviate the intertemporal distortion and make present-biased transfer recipients better off. Further, transfers in kind are asymmetrical in the sense that they can target present-biased recipients without affecting fully rational recipients.

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    File URL: http://www.econ.ku.dk/epru/files/wp/wp-05-11.pdf
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    Bibliographic Info

    Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 05-11.

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    Length: 35 pages
    Date of creation: Sep 2005
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    Handle: RePEc:kud:epruwp:05-11

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    Keywords: in-kind transfers; time preference;

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    1. O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    2. Currie, Janet, 2004. "The Take-Up of Social Benefits," IZA Discussion Papers 1103, Institute for the Study of Labor (IZA).
    3. Bruce, Neil & Waldman, Michael, 1991. "Transfers in Kind: Why They Can Be Efficient and Nonpaternalistic," American Economic Review, American Economic Association, vol. 81(5), pages 1345-51, December.
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