Habit formation and labor supply

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

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

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: 2008-06-01
References: Add references at CitEc
Citations: View citations in EconPapers (5)

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

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