Habit Formation and Labor Supply

Helmuth Cremer (), Philippe De Donder, Darío Maldonado () and Pierre Pestieau ()

No CESifo Working Paper No. 2351, CESifo Working Paper Series from CESifo Group Munich

Abstract: 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.

Keywords: habit formation; myopia; unretiring (search for similar items in EconPapers)
JEL-codes: D91 H21 H55 (search for similar items in EconPapers)
Date: 2008
View list of references

Downloads: (external link)
http://www.cesifo.de/DocCIDL/cesifo1_wp2351.pdf (application/pdf)

Related works:
Working Paper: Habit formation and labor supply (2008)
Working Paper: Habit Formation and Labour Supply (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ces:ceswps:_2351

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Group Munich
Address: Poschingerstrasse 5, 81679 Munich
Series data maintained by Julio Saavedra ().