Welfare and Tax Policies in a Neoclassical Growth Model with Non-unitary Discounting

Ryoji Ohdoi, Koichi Futagami and Takeo Hori ()
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Takeo Hori: College of Economics, Aoyama Gakuin University

No 15-14, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: In this paper, we propose a neoclassical growth model with non-unitary discount- ing, where an individual discounts her future utilities from consumption and leisure differently. Because this non-unitary discounting induces the individual's preference reversals, we regard one individual as being composed of different selves. Then we derive the closed-form solution of the recursive competitive equilibrium in which her different selves behave in a time-consistent way in all periods. With regard to welfare analysis, we obtain the following three main results. First, the selves in any period strictly prefer the planning allocation to the laissez-faire allocation if they are given the same value of a state variable in both situations. Second, the selves in the long run can prefer the latter to the former allocation if we focus on the overall equilibrium paths in both situations. Third, a time-consistent tax policy designed by a benevolent government replicates the planning allocation.

Keywords: Non-unitary discounting; Time-inconsistency; Intrapersonal game; Markov- perfect equilibrium; Time-consistent tax policy (search for similar items in EconPapers)
JEL-codes: E21 H21 O41 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2015-05
New Economics Papers: this item is included in nep-gro, nep-mac and nep-pbe
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