Habit Formation and Labour Supply

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

No 6776, CEPR Discussion Papers from Centre for Economic Policy Research

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: 2008-04
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Working Paper: Habit Formation and Labor Supply (2008)
Working Paper: Habit formation and labor supply (2008)
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