Habit formation and labor supply

Helmuth Cremer (), Philippe De Donder, Darío Maldonado () and Pierre PESTIEAU
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Pierre PESTIEAU: UniversitŽ catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)

No 2008038, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper shows that the combination of habit formation Ð present consumption creating additional consumption needs in the future Ð 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: 2008-06-01

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http://www.uclouvain.be/cps/ucl/doc/core/documents/coredp2008_38.pdf (application/pdf)

Related works:
Working Paper: Habit Formation and Labor Supply (2008)
Working Paper: Habit Formation and Labour Supply (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:cor:louvco:2008038

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