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Habit formation and labor supply

Author

Listed:
  • CREMER, Helmuth
  • DE DONDER, Philippe
  • MALDONADO, Dario
  • PESTIEAU, Pierre

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

Abstract

This paper shows that the combination of habit formation – present consumption creating additional consumption needs in the future – 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.

Suggested Citation

  • CREMER, Helmuth & DE DONDER, Philippe & MALDONADO, Dario & PESTIEAU, Pierre, 2008. "Habit formation and labor supply," CORE Discussion Papers 2008038, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2008038
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    File URL: http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2008_38.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
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    Cited by:

    1. Ricky Kanabar, 2012. "Unretirement in England: An empirical perspective," Discussion Papers 12/31, Department of Economics, University of York.
    2. Matti Tuomala & Sanna Tenhunen, 2013. "On the design of an optimal non-linear tax/pension system with habit formation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(3), pages 485-512, June.

    More about this item

    Keywords

    habit formation; myopia; unretiring;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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