We thank a co-editor and four anonymous referees for important suggestions and comments. This paper is a shortened and substantially revised version of an earlier paper with the same title; the quantitative analysis in the earlier paper is now contained in a new paper titled “How Much Can Taxation Alleviate Temptation and Self-Control Problems?”
Temptation and Taxation
Article first published online: 3 DEC 2010
© 2010 The Econometric Society
Volume 78, Issue 6, pages 2063–2084, November 2010
How to Cite
Krusell, P., Kuruşçu, B. and Smith, A. A. (2010), Temptation and Taxation. Econometrica, 78: 2063–2084. doi: 10.3982/ECTA8611
- Issue published online: 3 DEC 2010
- Article first published online: 3 DEC 2010
- Manuscript received June, 2009; final revision received April, 2010.
- optimal taxation
We study optimal taxation when consumers have temptation and self-control problems. Embedding the class of preferences developed by Gul and Pesendorfer into a standard macroeconomic setting, we first prove, in a two-period model, that the optimal policy is to subsidize savings when consumers are tempted by “excessive” impatience. The savings subsidy improves welfare because it makes succumbing to temptation less attractive. We then study an economy with a long but finite horizon which nests, as a special case, the Phelps–Pollak–Laibson multiple-selves model (thereby providing guidance on how to evaluate welfare in this model). We prove that when period utility is logarithmic, the optimal savings subsidies increase over time for any finite horizon. Moreover, as the horizon grows large, the optimal policy prescribes a constant subsidy, in contrast to the well known Chamley–Judd result.