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Time-Inconsistency and Welfare

  • Jay Bhattacharya
  • Darius Lakdawalla

Self-control devices, such as rehabilitation programs, group commitment, and informal fines, can make time-inconsistent smokers better off. Health economists have used this result to argue in favor of cigarette taxes that restrain smoking. However, taxes alone are not Pareto-improving overall, because they benefit today's smoker at the expense of her future selves, who have less demand for self-control. We suggest an alternative class of taxation policies that provide selfcontrol and benefit a smoker at every point in life. Smokers could be allowed to purchase smoking licenses' when they start to smoke, and in exchange commit their future selves to face compensated cigarette taxes. We show that this scheme which could be made voluntary improves the welfare of current and future smokers, generates positive revenue for the government, and can be made incentive-compatible. Similar schemes can also be envisioned to address problems of timeinconsistency in other contexts.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10345.

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Date of creation: Mar 2004
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Handle: RePEc:nbr:nberwo:10345
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  1. Andrew Caplin & John Leahy, 2001. "The social discount rate," Discussion Paper / Institute for Empirical Macroeconomics 137, Federal Reserve Bank of Minneapolis.
  2. Jonathan Gruber & Botond Koszegi, 2000. "Is Addiction "Rational"? Theory and Evidence," NBER Working Papers 7507, National Bureau of Economic Research, Inc.
  3. Gruber, Jonathan & Koszegi, Botond, 2004. "Tax incidence when individuals are time-inconsistent: the case of cigarette excise taxes," Journal of Public Economics, Elsevier, vol. 88(9-10), pages 1959-1987, August.
  4. Ted O'Donoghue & Matthew Rabin, 2003. "Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes," American Economic Review, American Economic Association, vol. 93(2), pages 186-191, May.
  5. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  6. Jonathan Gruber & Botond Köszegi, 2001. "Is Addiction "Rational"? Theory And Evidence," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1261-1303, November.
  7. Goldman, Steven Marc, 1979. "Intertemporally Inconsistent Preferences and the Rate of Consumption," Econometrica, Econometric Society, vol. 47(3), pages 621-26, May.
  8. Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
  9. Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
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