Habit formation and labor supply

Arbeitspapier

This paper shows that the combination of habit formation - present consumption creating additional consumption needs in the future - and myopia may explain why some retirees are forced to unretire, i.e., unexpectedly return to work. It also shows that when myopia about habit formation leads to unretirement there is a case for government's intervention. In a first-best setting the optimal solution can be decentralized by a simple Pigouvian (paternalistic) consumption tax (along with suitable lump-sum taxes). In a second-best setting, when personalized lump-sum transfers are not available, consumption taxes may have conflicting paternalistic and redistributive effects. We study the design of consumption taxes in such a setting when myopic individuals differ in productivity.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 2351

Classification and Topics

• Classification: Wirtschaft ; Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡ ; Taxation and Subsidies: Efficiency; Optimal Taxation ; Social Security and Public Pensions
• Subject: Habit formation ; myopia ; unretiring ; Einkommenshypothese ; Konsum ; Risiko ; Altersgrenze ; Arbeitsangebot ; Verbrauchsteuer ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cremer, Helmuth ; de Donder, Philippe ; Maldonado, Darío ; Pestieau, Pierre
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/26396
• Last update: 10.03.2025, 11:45 AM CET