Habit Formation and Labor Supply

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

No 2351, CESifo Working Paper Series from CESifo

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.cesifo.org/DocDL/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: https://EconPapers.repec.org/RePEc:ces:ceswps:_2351

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().