Time-Inconsistency and Welfare
AbstractSelf-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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Date of creation: Mar 2004
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Find related papers by JEL classification:
- I1 - Health, Education, and Welfare - - Health
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-31 (All new papers)
- NEP-HEA-2004-03-07 (Health Economics)
- NEP-PBE-2004-03-07 (Public Economics)
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