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Endogenous discounting, wariness, and efficient capital taxation

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  • Araujo, Aloisio
  • Gama, Juan Pablo
  • Novinski, Rodrigo
  • Pascoa, Mario R.

Abstract

When the discount factors that infinite lived consumers use at each date are not predetermined but are instead chosen within some set, depending on what the consumption plan is, impatience might not hold. More precisely, if the utility is the infimum of discounted utilities over that set of discount factor sequences, then preferences may be just upper semi-impatient. Such lack of lower semi-impatience, which we refer to as wariness, consists in neglecting distant gains but not distant losses. Examples are the precautionary case (a concern with the worst lifetime outcome) and the habit persistence case (a concern with a fall in living standards). The implementation of efficient allocations by trading assets sequentially requires taxes that avoid excessive savings by raising the opportunity of cost of saving up to the point of matching the marginal benefit of dishoarding at distant dates. Taxes on equilibrium plans are zero in many contexts.

Suggested Citation

  • Araujo, Aloisio & Gama, Juan Pablo & Novinski, Rodrigo & Pascoa, Mario R., 2019. "Endogenous discounting, wariness, and efficient capital taxation," Journal of Economic Theory, Elsevier, vol. 183(C), pages 520-545.
  • Handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:520-545
    DOI: 10.1016/j.jet.2019.07.004
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    1. Araujo, Aloisio & Gama, Juan Pablo & Pascoa, Mario Rui, 2019. "Crashing of efficient stochastic bubbles," Journal of Mathematical Economics, Elsevier, vol. 84(C), pages 136-143.

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    More about this item

    Keywords

    General equilibrium; Monetary equilibrium; Efficient taxation; Endogenous discounting; Transversality condition; Pure charges;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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