Optimal taxation in a habit formation economy
2015 (English)In: Journal of Public Economics, ISSN 0047-2727, E-ISSN 1879-2316, Vol. 122, 31-39 p.Article in journal (Refereed) Published
This paper studies habit formation in consumption preferences in a dynamic Mirrlees economy. We derive optimal labor and savings wedges based on a recursive approach. We show that habit formation creates a motive for subsidizing labor supply and savings. In particular, habit formation invalidates the well-known no distortion at the top result. We demonstrate that the theoretical findings are quantitatively important: in a parametrized life-cycle model, average labor and savings wedges fall by more than one-third compared with the case of time-separable preferences.
Place, publisher, year, edition, pages
2015. Vol. 122, 31-39 p.
Optimal taxation, Habit formation, Recursive contracts
Economics and Business
IdentifiersURN: urn:nbn:se:su:diva-117044DOI: 10.1016/j.pubeco.2014.12.007ISI: 000352047900003OAI: oai:DiVA.org:su-117044DiVA: diva2:812121