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State-Variable Public Goods When Relative Consumption Matters: A Dynamic Optimal Taxation Approach

  • Aronsson, Thomas

    ()

    (Department of Economics, Umeå University)

  • Johansson-Stenman, Olof

    ()

    (Department of Economics, School of Business, Economics and Law, University of Gothenburg)

This paper concerns the optimal provision of a state-variable public good, where the global climate is the prime example. The analysis is based on a two-type optimal income tax model with overlapping generations, where people care about their relative consumption. We consider both keeping-up-with-the-Joneses preferences (where people compare their own current consumption with others’ current consumption) and catching-up-with-the-Joneses preferences (where people compare their own current consumption with others’ past consumption). The extent to which the rule for public provision ought to be modified is shown to depend crucially on the preference elicitation format.

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Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 828.

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Length: 44 pages
Date of creation: 20 Jun 2011
Date of revision:
Handle: RePEc:hhs:umnees:0828
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Department of Economics, Umeå University, S-901 87 Umeå, Sweden

Phone: 090 - 786 61 42
Fax: 090 - 77 23 02
Web page: http://www.econ.umu.se/
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