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Welfare and Tax Policies in a Neoclassical Growth Model with Non-unitary Discounting

Author

Listed:
  • Ryoji Ohdoi

    (Department of Social Engineering, Tokyo Institute of Technology)

  • Koichi Futagami

    (Graduate School of Economics, Osaka University)

  • Takeo Hori

    (College of Economics, Aoyama Gakuin University)

Abstract

In this paper, we propose a neoclassical growth model with non-unitary discount- ing, where an individual discounts her future utilities from consumption and leisure differently. Because this non-unitary discounting induces the individual's preference reversals, we regard one individual as being composed of different selves. Then we derive the closed-form solution of the recursive competitive equilibrium in which her different selves behave in a time-consistent way in all periods. With regard to welfare analysis, we obtain the following three main results. First, the selves in any period strictly prefer the planning allocation to the laissez-faire allocation if they are given the same value of a state variable in both situations. Second, the selves in the long run can prefer the latter to the former allocation if we focus on the overall equilibrium paths in both situations. Third, a time-consistent tax policy designed by a benevolent government replicates the planning allocation.

Suggested Citation

  • Ryoji Ohdoi & Koichi Futagami & Takeo Hori, 2015. "Welfare and Tax Policies in a Neoclassical Growth Model with Non-unitary Discounting," Discussion Papers in Economics and Business 15-14, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1514
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    References listed on IDEAS

    as
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    6. Takeo Hori & Koichi Futagami, 2019. "A Non‐unitary Discount Rate Model," Economica, London School of Economics and Political Science, vol. 86(341), pages 139-165, January.
    7. Ubfal, Diego, 2016. "How general are time preferences? Eliciting good-specific discount rates," Journal of Development Economics, Elsevier, vol. 118(C), pages 150-170.
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    More about this item

    Keywords

    Non-unitary discounting; Time-inconsistency; Intrapersonal game; Markov- perfect equilibrium; Time-consistent tax policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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