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Internalities and Paternalism: Applying the Compensation Criterion to Multiple Selves across Time

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  • Eric Rasmusen

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

One reason to call an activity a vice and suppress it is that it reduces a person’s future happiness more than it increases his present happiness. Gruber and Koszegi (2001) show how a vice tax can increase a person’s welfare in a model of multiple selves with hyperbolic preferences across time. The present paper shows that an interself analogy of the Kaldor-Hicks compensation criterion can justify a vice ban whether preferences are hyperbolic or exponential, but subject to the caveat that the person has a binding constraint on borrowing.

Suggested Citation

  • Eric Rasmusen, 2008. "Internalities and Paternalism: Applying the Compensation Criterion to Multiple Selves across Time," Working Papers 2008-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  • Handle: RePEc:iuk:wpaper:2008-13
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    References listed on IDEAS

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    Keywords

    internalities; sin tax; moral regulation; Kaldor-Hicks criterion; time inconsistency; hyperbolic preferences;

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