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Present-Biased Individuals, Optimal Paternalism, and Transfers in Kind

  • Jes Winther Hansen

    (Department of Economics, University of Denmark)

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    Present-biased preferences cause distortions in consumption that can motivate the use of paternalistic in-kind transfers. Empirically, goods are consumed to different degrees when consumption outlay changes. Economists distinguish between necessary goods and luxury goods. A present-biased individual has an intertemporal distortion of consumption toward the present, which in turn distorts present consumption toward luxury goods. In-kind transfers of necessary goods, such as food stamps, can alleviate the intertemporal distortion and make present-biased transfer recipients better off. Further, transfers in kind are asymmetrical in the sense that they can target present-biased recipients without affecting fully rational recipients.

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    File URL: http://www.econ.ku.dk/epru/files/wp/wp-05-11.pdf
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    Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 05-11.

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    Length: 35 pages
    Date of creation: Sep 2005
    Date of revision:
    Handle: RePEc:kud:epruwp:05-11
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    1. Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Currie, Janet, 2004. "The Take-Up of Social Benefits," IZA Discussion Papers 1103, Institute for the Study of Labor (IZA).
    3. Neil Bruce & Michael Waldman, 1988. "Transfers in Kind: Why They Can Be Efficient and Non-Paternalistic," UCLA Economics Working Papers 532, UCLA Department of Economics.
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