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Equilibrium Welfare and Government Policy with Quasi-Geometric Discounting

  • Krusell, Per
  • Kuruscu, Burhanettin
  • Smith Jr., Anthony A

We consider a representative-agent equilibrium model where the consumer has quasi-geometric discounting and cannot commit to future actions. With restricted attention to a parametric class for preferences and technology logarithmic utility, Cobb-Douglas production, and full depreciation we solve for time-consistent competitive equilibria globally and explicitly. For this class, we characterize the welfare properties of competitive equilibria and compare them to that of a planning problem. The planner is a consumer representative who, without commitment but in a time-consistent way, maximizes his present-value utility subject to resource constraints. The competitive equilibrium results in strictly higher welfare than does the planning problem whenever the discounting is not geometric. We also explicitly consider taxation in our environment. With a benevolent government that can tax income and capital, but cannot commit its future tax rates, time-consistent taxation leads to positive tax rates on capital. These tax rates reproduce the central planning solution, and thus imply a worse outcome in welfare terms than when there is no government.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2693.

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Date of creation: Feb 2001
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Handle: RePEc:cpr:ceprdp:2693
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  1. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers 99f2, Economics Department, Princeton University.
  2. Per Krusell & Burhanettin Kuruşçu & Anthony A. Smith Jr., 2010. "Temptation and Taxation," Econometrica, Econometric Society, vol. 78(6), pages 2063-2084, November.
  3. David I. Laibson, 1996. "Hyperbolic Discount Functions, Undersaving, and Savings Policy," NBER Working Papers 5635, National Bureau of Economic Research, Inc.
  4. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers 99f1, Economics Department, Princeton University.
  5. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
  6. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
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