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Optimal Taxation When Consumers Have Endogenous Benchmark Levels of Consumption

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  • Andrew B. Abel

Abstract

I examine optimal taxes in an overlapping generations economy in which each consumer's utility depends on consumption relative to a weighted average of consumption by others (the benchmark level of consumption) as well as on the level of the consumer's own consumption. The socially optimal balanced growth path is characterized by the Modified Golden Rule and by a condition on the intergenerational allocation of consumption in each period. A competitive economy can be induced to attain the social optimum by a lump-sum pay-as-you-go social security system and a tax on capital income.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10099.

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Date of creation: Nov 2003
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Publication status: published as Abel, Andrew B. "Optimal Taxation When Consumers Have Endogenous Benchmark Levels Of Consumption," Review of Economic Studies, 2005, v72(250,Jan), 21-42.
Handle: RePEc:nbr:nberwo:10099

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  1. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(4), pages 589-601, November.
  2. Carlos Garriga-Calvet, 2000. "Optimal Fiscal Policy in Overlapping Generations Models," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1772, Econometric Society.
  3. Andrew B. Abel, 1998. "Risk Premia and Term Premia in General Equilibrium," NBER Working Papers, National Bureau of Economic Research, Inc 6683, National Bureau of Economic Research, Inc.
  4. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers, National Bureau of Economic Research, Inc 3279, National Bureau of Economic Research, Inc.
  5. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 423-428, March.
  6. Erosa, Andres & Gervais, Martin, 2002. "Optimal Taxation in Life-Cycle Economies," Journal of Economic Theory, Elsevier, Elsevier, vol. 105(2), pages 338-369, August.
  7. de La Croix, D. & Michel, P., 1997. "Optimal Growth When Tastes Are Inherited," G.R.E.Q.A.M., Universite Aix-Marseille III 97a21, Universite Aix-Marseille III.
  8. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers, Federal Reserve Bank of Philadelphia 94-17, Federal Reserve Bank of Philadelphia.
  9. Wen-Fang Liu & Stephen Turnovsky, 2003. "Consumption Externalities, Production Externalities, and the Accumulation of Capital," Working Papers, University of Washington, Department of Economics UWEC-2002-13-P, University of Washington, Department of Economics, revised Nov 2003.
  10. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
  11. Harald Uhlig & Lars Ljungqvist, 2000. "Tax Policy and Aggregate Demand Management under Catching Up with the Joneses," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 356-366, June.
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Cited by:
  1. Stuart Adam, 2005. "Measuring the marginal efficiency cost of redistribution in the UK," IFS Working Papers, Institute for Fiscal Studies W05/14, Institute for Fiscal Studies.
  2. Luttmer, Erzo F. P., 2004. "Neighbors as Negatives: Relative Earnings and Well-Being," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp04-029, Harvard University, John F. Kennedy School of Government.
  3. Mino, Kazuo, 2006. "Consumption Externalities and Capital Accumulation in an Overlapping Generations Economy," MPRA Paper, University Library of Munich, Germany 17016, University Library of Munich, Germany.
  4. Frederick van der Ploeg, 2004. "The Welfare State, Redistribution and the Economy, Reciprocal Altruism, Consumer Rivalry and Second Best," CESifo Working Paper Series, CESifo Group Munich 1234, CESifo Group Munich.

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