State-Variable Public Goods When Relative Consumption Matters: A Dynamic Optimal Taxation Approach

Thomas Aronsson () and Olof Johansson-Stenman ()
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Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

No 828, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: This paper concerns the optimal provision of a state-variable public good, where the global climate is the prime example. The analysis is based on a two-type optimal income tax model with overlapping generations, where people care about their relative consumption. We consider both keeping-up-with-the-Joneses preferences (where people compare their own current consumption with others’ current consumption) and catching-up-with-the-Joneses preferences (where people compare their own current consumption with others’ past consumption). The extent to which the rule for public provision ought to be modified is shown to depend crucially on the preference elicitation format.

Keywords: State variable public goods; asymmetric information; relative consumption; status; positional preferences; climate policy (search for similar items in EconPapers)
JEL-codes: D62 H21 H23 H41 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2011-06-20
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