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Time-Inconsistency and Welfare

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  • Jay Bhattacharya
  • Darius Lakdawalla

Abstract

Self-control devices, such as rehabilitation programs, group commitment, and informal fines, can make time-inconsistent smokers better off. Health economists have used this result to argue in favor of cigarette taxes that restrain smoking. However, taxes alone are not Pareto-improving overall, because they benefit today's smoker at the expense of her future selves, who have less demand for self-control. We suggest an alternative class of taxation policies that provide selfcontrol and benefit a smoker at every point in life. Smokers could be allowed to purchase smoking licenses' when they start to smoke, and in exchange commit their future selves to face compensated cigarette taxes. We show that this scheme which could be made voluntary improves the welfare of current and future smokers, generates positive revenue for the government, and can be made incentive-compatible. Similar schemes can also be envisioned to address problems of timeinconsistency in other contexts.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10345.

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Date of creation: Mar 2004
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Handle: RePEc:nbr:nberwo:10345

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  1. Andrew Caplin & John Leahy, 2001. "The social discount rate," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 137, Federal Reserve Bank of Minneapolis.
  2. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers, University of California at Berkeley 97-253, University of California at Berkeley.
  3. Gruber, Jonathan & Koszegi, Botond, 2004. "Tax incidence when individuals are time-inconsistent: the case of cigarette excise taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 88(9-10), pages 1959-1987, August.
  4. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
  5. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(4), pages 1261-1303, November.
  6. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 186-191, May.
  7. Jonathan Gruber & Botond Koszegi, 2000. "Is Addiction "Rational"? Theory and Evidence," NBER Working Papers 7507, National Bureau of Economic Research, Inc.
  8. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(2), pages 573-97, May.
  9. Goldman, Steven Marc, 1979. "Intertemporally Inconsistent Preferences and the Rate of Consumption," Econometrica, Econometric Society, Econometric Society, vol. 47(3), pages 621-26, May.
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Cited by:
  1. Padmaja Ayyagari & Jody L. Sindelar, 2009. "The Impact of Job Stress on Smoking and Quitting: Evidence from the HRS," NBER Working Papers 15232, National Bureau of Economic Research, Inc.
  2. Bhattacharya, Jay & Bundorf, M. Kate, 2009. "The incidence of the healthcare costs of obesity," Journal of Health Economics, Elsevier, Elsevier, vol. 28(3), pages 649-658, May.
  3. repec:ebl:ecbull:v:4:y:2007:i:43:p:1-8 is not listed on IDEAS
  4. Markus Haavio & Kaisa Kotakorpi, 2012. "Sin Licenses Revisited," CESifo Working Paper Series 4010, CESifo Group Munich.
  5. Heutel, Garth, 2010. "Optimal Policy Instruments for Externality-Producing Durable Goods under Time Inconsistency," Working Papers 10-5, University of North Carolina at Greensboro, Department of Economics.
  6. B. Douglas Bernheim & Antonio Rangel, 2008. "Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics," NBER Working Papers 13737, National Bureau of Economic Research, Inc.
  7. Gannon, Brenda & Layte, Richard & McGregor, Pat & Madden, David & Nolan, Anne & O'Neill, Ciaran & Smith, Samantha, 2007. "The Provision and Use of Health Services, Health Inequalities and Health and Social Gain," Research Series, Economic and Social Research Institute (ESRI), Economic and Social Research Institute (ESRI), number BMI196 edited by Nolan, Brian.
  8. David Madden, 2007. "Health Interventions and Risky Behaviour," Working Papers, School Of Economics, University College Dublin 200709, School Of Economics, University College Dublin.
  9. Marc Fusaro & Richard Ericson, 2010. "The Welfare Economics of “Bounce Protection” Programs," Journal of Consumer Policy, Springer, Springer, vol. 33(1), pages 55-73, March.
  10. Eric Rasmusen, 2008. "Internalities and Paternalism: Applying the Compensation Criterion to Multiple Selves across Time," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2008-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.

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