Habit formation and labor supply
This paper shows that the combination of habit formation â€“ present consumption creating additional consumption needs in the future â€“ and myopia may explain why some retirees are forced to "unretire", i.e., unexpectedly return to work. It also shows that when myopia about habit formation leads to unretirement there is a case for government's intervention. In a first-best setting the optimal solution can be decentralized by a simple "Pigouvian" (paternalistic) consumption tax (along with suitable lump-sum taxes). In a second-best setting, when personalized lump-sum transfers are not available, consumption taxes may have conflicting paternalistic and redistributive effects. We study the design of consumption taxes in such a setting when myopic individuals differ in productivity.
|Date of creation:||01 Jun 2008|
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- Hammond, Peter & Myles, Gareth (ed.), 2000. "Incentives, Organization, and Public Economics: Papers in Honour of Sir James Mirrlees," OUP Catalogue, Oxford University Press, number 9780199242290, March.
- Jean-Marie Lozachmeur, 2006.
"Optimal Age-Specific Income Taxation,"
Journal of Public Economic Theory,
Association for Public Economic Theory, vol. 8(4), pages 697-711, October.
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