Adaptation, anticipation-bias and optimal income taxation
Aronsson, Thomas ;  Schöb, Ronnie ;  Universität <Berlin, Freie Universität> / Fachbereich Wirtschaftswissenschaft

Main titleAdaptation, anticipation-bias and optimal income taxation
AuthorAronsson, Thomas
AuthorSchöb, Ronnie
InstitutionUniversität <Berlin, Freie Universität> / Fachbereich Wirtschaftswissenschaft
No. of Pages25 S.
Series Discussion paper / School of Business & Economics ; 2012/13 : Economics
KeywordsOptimal taxation; adaptation; habit-formation; anticipation-bias; paternalism
Classification (DDC)336 Public finance
AbstractAdaptation is omnipresent but people systematically fail to correctly anticipate the degree to which they adapt. This leads individuals to make inefficient intertemporal decisions. This paper concerns optimal income taxation to correct for such anticipation-biases in a framework where consumers adapt to earlier consumption levels through a habit-formation process. The analysis is based on a general equilibrium OLG model with endogenous labor supply and savings where each consumer lives for three periods. Our 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. Furthermore, the optimal policy mix remains the same, irrespective of whether consumers commit to their original life-time plan for work hours and savings decided upon in the first period of life or re-optimize later on when realizing the failure to adapt.
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FU DepartmentDepartment Business and Economics
Other affiliation(s)Lehrstuhl für Finanzwissenschaft mit dem Schwerpunkt Internationale Finanzpolitik
Year of publication2012
Type of documentBook
Terms of use/Rights Nutzungsbedingungen
Created at2012-06-08 : 02:04:50
Last changed2014-01-23 : 04:20:21
Static URLhttp://edocs.fu-berlin.de/docs/receive/FUDOCS_document_000000013775