Internalities and Paternalism: Applying the Compensation Criterion to Multiple Selves across Time

Eric Rasmusen ()

No 2008-13, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: One reason to call an activity a vice and suppress it is that it reduces a person’s future happiness more than it increases his present happiness. Gruber and Koszegi (2001) show how a vice tax can increase a person’s welfare in a model of multiple selves with hyperbolic preferences across time. The present paper shows that an interself analogy of the Kaldor-Hicks compensation criterion can justify a vice ban whether preferences are hyperbolic or exponential, but subject to the caveat that the person has a binding constraint on borrowing.

Keywords: internalities; sin tax; moral regulation; Kaldor-Hicks criterion; time inconsistency; hyperbolic preferences (search for similar items in EconPapers)
Date: 2008-10
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