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Voting under temptation

  • Monisankar Bishnu

    ()

    (Indian Statistical Institute, New Delhi)

  • Min Wang

    ()

    (Michigan State Universitywth)

In the presence of temptation and self-control preferences as in Gul and Pesendorfer, the optimal policy is to subsidize savings when consumers are tempted by "excessive" impatience (Krusell, Kuruscu and Smith, 2010). However, in the homogeneous agents model, taxation loses an important property in that it fails to reduce the inequality through redistribution. Thus the phenomenon that welfare improves on subsidizing savings may vanish when the agents differ in their abilities to earn income. They may well choose a positive tax if they are from low ability group where the redistribution effect of tax dominates the temptation effect. In a political economy, a situation may easily arise where a negative tax will never be implemented. When agents are homogeneous, as temptation grows, optimal subsidy on saving increases. The corresponding result in the heterogeneous agents case is that as temptation grows, the political support for the subsidy increases.

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Paper provided by Indian Statistical Institute, New Delhi, India in its series Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers with number 12-03.

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Length: 24 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:ind:isipdp:12-03
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  1. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
  2. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  3. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  4. Faruk Gul & Wolfgang Pesendorfer, 2005. "The Revealed Preference Theory of Changing Tastes," Review of Economic Studies, Oxford University Press, vol. 72(2), pages 429-448.
  5. Per Krusell & Burhanettin Kuruscu & Anthony A. Smith, Jr., 2000. "Temptation and Taxation," GSIA Working Papers 2001-12, Carnegie Mellon University, Tepper School of Business.
  6. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  7. Marco Bassetto & Jess Benhabib, 2006. "Redistribution, Taxes and the Median Voter," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 211-223, April.
  8. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers 99f2, Economics Department, Princeton University.
  9. Daron Acemoglu & Mikhail Golosov & Aleh Tsyvinski, 2007. "Political Economy of Mechanisms," Levine's Bibliography 321307000000000886, UCLA Department of Economics.
  10. Manuel Amador & Ivan Werning & George-Marios Angeletos, 2003. "Commitment Vs. Flexibility," NBER Working Papers 10151, National Bureau of Economic Research, Inc.
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