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General Equilibrium Tax Policy with Hyperbolic Consumers

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  • Toke Ward Petersen

Abstract

Recently David Laibson (1998) and others have argued in favor of using hyperbolic discount functions. The purpose of this paper is to investigate whether conventional wisdom, based on the standard model with exponential discounting, also holds in the case where consumers have hyperbolic discount functions. In other words do hyperbolic preferences matter for practical policy evaluation? Within the framework of a suitably modified standard General Equilibrium model a la Auerbach and Kotlikoff (1987), this is done by simulations of both fundamental changes in the tax base, as well as more marginal experiments comparing the excess burden of taxation. Based on the simulations it turns out that the answer to the question is a maybe: if preferences are sufficiently hyperbolic then policy conclusions change. Unfortunately this degree of hyperbolicness in the discounting function is at the level that is considered realistic by empirical studies.

Suggested Citation

  • Toke Ward Petersen, 2001. "General Equilibrium Tax Policy with Hyperbolic Consumers," Computing in Economics and Finance 2001 189, Society for Computational Economics.
  • Handle: RePEc:sce:scecf1:189
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    More about this item

    Keywords

    hyperbolic discounting; tax reform;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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