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Consumption Adaptation, Anticipation-Bias, and Optimal Income Taxation
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE), Economics.
Freie Universität, Berlin.
2017 (English)In: Journal of Public Economic Theory, ISSN 1097-3923, E-ISSN 1467-9779, Vol. 19, no 3, 713-731 p.Article in journal (Refereed) Published
Abstract [en]

Adaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt, leading them to make irrational intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation-biases in a framework where consumers adapt to earlier consumption levels. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. The results show how a paternalistic government may correct for the effects of anticipation-bias through a combination of time-variant-marginal labor income taxes and savings subsidies/taxes. The optimal policy mix remains the same, irrespective of whether consumers commit to their original life time plan for work hours and consumption or reoptimize later on when realizing that they have already adapted more than expected.

Place, publisher, year, edition, pages
2017. Vol. 19, no 3, 713-731 p.
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:umu:diva-124570DOI: 10.1111/jpet.12227ISI: 000404443300008OAI: oai:DiVA.org:umu-124570DiVA: diva2:953022
Funder
Riksbankens Jubileumsfond, RS10-1319:1
Available from: 2016-08-16 Created: 2016-08-16 Last updated: 2017-10-17Bibliographically approved

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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf