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General Equilibrium Tax Policy with Hyperbolic Consumers

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  • Toke Ward Petersen

    () (Institute of Economics, University of Copenhagen, Studiestræde 6, DK-1455 Copenhagen, Denmark)

Abstract

Recently David Laibson (1998) and others have argued in favor of using hyperbolic discount functions. The purpose of this paper is to investigate whether conventional wisdom, based on the standard model with exponential discounting, also holds in the case where consumers have hyperbolic discount functions. In other words to hyperbolic preferences matter for practical policy evaluation? Within the framework of a suitably modified standard General Equilibrium model ý la Auerbach and Kotlikoff (1987), this is done by simulations of both fundamental changes in the tax base, as well as more marginal experiments comparing the excess burden of taxation. Based on the simulations it turns out that the answer to the question is a maybe: if preferences are sufficiently hyperbolic then policy conclusions change. Unfortunately this degree of hyperbolicness in the discounting function is at the level that is considered realistic by empirical studies.

Suggested Citation

  • Toke Ward Petersen, 2004. "General Equilibrium Tax Policy with Hyperbolic Consumers," Computational Economics, Springer;Society for Computational Economics, vol. 23(2), pages 105-120, March.
  • Handle: RePEc:kap:compec:v:23:y:2004:i:2:p:105-120
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    Cited by:

    1. Muehlbacher, Stephan & Mittone, Luigi & Kastlunger, Barbara & Kirchler, Erich, 2012. "Uncertainty resolution in tax experiments: Why waiting for an audit increases compliance," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(3), pages 289-291.

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