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Taxes and labour supply under interdependent preferences

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  • Woźny, Łukasz
  • Garbicz, Marek
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    Abstract

    In this paper we identify how changes in the income tax rate affect the labour supply under interdependent utility functions. To reach that aim we create a model of the economy in which households choosing their optimal labour supply take into account not only their income, tax rate and individual consumption but also so called relative consumption level (Garbicz 1997). Taking into account the last issue we significantly modify the well known Becker model (1965). We conduct a comparative statics exercise using na lattice and supermodular game theory. Thanks to which we show sufficient and necessary conditions for a labour supply to be monotonic function of the income tax rate. We analyze the economic behaviour under static and dynamic setup. Under quite general assumptions concerning the household utility function we show that the higher the tax rate the lower the macroeconomic labour supply. Additionally we show the possibility of multiple equilibria in the economy that offers the explanation of differences in the working time between e.g. European countries and the US as well as discrepancies between micro and macroeconomic elasticity of labour supply (see Alesina, Glaeser, and Sacerdote 2005).

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 462.

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    Date of creation: Jun 2005
    Date of revision: Jun 2005
    Handle: RePEc:pra:mprapa:462

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    Related research

    Keywords: supermodularity; lattice programming; multiplicity; interdependent preferences; labour supply;

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    1. Edward C. Prescott, 2004. "Why Do Americans Work So Much More Than Europeans?," Levine's Bibliography 122247000000000413, UCLA Department of Economics.
    2. Federico Echenique, 2002. "Comparative Statics by Adaptive Dynamics and the Correspondence Principle," Econometrica, Econometric Society, vol. 70(2), pages 833-844, March.
    3. Amir, Rabah, 1996. "Sensitivity analysis of multisector optimal economic dynamics," Journal of Mathematical Economics, Elsevier, vol. 25(1), pages 123-141.
    4. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, vol. 62(1), pages 157-80, January.
    5. Alesina, Alberto F & Glaeser, Edward L & Sacerdote, Bruce, 2005. "Work and Leisure in the US and Europe: Why So Different?," CEPR Discussion Papers 5140, C.E.P.R. Discussion Papers.
    6. Daniel John Zizzo, 2003. "Empirical evidence on interdependent preferences: nature or nurture?," Cambridge Journal of Economics, Oxford University Press, vol. 27(6), pages 867-880, November.
    7. Edward L. Glaeser & Bruce I. Sacerdote & Jose A. Scheinkman, 2002. "The Social Multiplier," Harvard Institute of Economic Research Working Papers 1968, Harvard - Institute of Economic Research.
    8. Aaron S. Edlin and Chris Shannon., 1995. "Strict Monotonicity in Comparative Statics," Economics Working Papers 95-238, University of California at Berkeley.
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