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Myopia, regrets, and risky behaviors

  • Pierre Pestieau

    ()

  • Gregory Ponthiere

    ()

This paper examines how a government should intervene when agents make, for different reasons, choices that have long term detrimental effects on their survival prospects. We consider an economy where some agents make risky choices (here sin good consumption) out of myopia, and regret their choices later on, whereas other agents make, because of their impatience, the same risky choices, which they never regret. We argue that, in the first-best, a government should only interfere with behaviors that agents regret, but not with other behaviors. In the second-best, asymmetric information and redistributive concerns imply interference not only with myopic behaviors, but also with impatience-based behaviors. Finally, we introduce heterogeneity in individual productivity, and show that the optimal tax on the sin good depends on the size of the myopic group, on the reactivity of sin good consumption to tax changes, and on the extent to which sin good consumption is correlated with labor earnings.

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File URL: http://hdl.handle.net/10.1007/s10797-011-9188-6
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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 19 (2012)
Issue (Month): 2 (April)
Pages: 288-317

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Handle: RePEc:kap:itaxpf:v:19:y:2012:i:2:p:288-317
DOI: 10.1007/s10797-011-9188-6
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