EconPapers    
Economics at your fingertips  
 

Too slow a change? Deep habits, consumption shifts and transitory tax

Inge van den Bijgaart ()

No 701, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: This paper studies shifts in the consumption bundle when consumption is subject to habit formation, and consumers do not internalize this habit formation process. Habits are goodspecific, or ’deep’, and cause persistence in good-specific consumption. In addition, at the aggregate level, habits act as benchmark against which consumption is evaluated. I establish that a rapid transition is optimal if the persistence effect is relatively strong, and determine the path of taxes or subsidies that implements this transition, both when goods are produced competitively and when they are produced by monopolists. To explore the quantitative implications of the model I consider the introduction of a 10 percent charge on a subset of goods. I find that consumption adjusts inefficiently fast; implementing first-best adjustment requires a transitory discount of up to 60 percent of the cost increase.

Keywords: habit formation; projection bias; consumption shifts; optimal taxation (search for similar items in EconPapers)
JEL-codes: D11 D62 H21 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2017-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/2077/52586 (text/html)

Related works:
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:hhs:gunwpe:0701

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers in Economics from University of Gothenburg, Department of Economics Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Ann-Christin Räätäri Nyström ().

 
Page updated 2019-11-14
Handle: RePEc:hhs:gunwpe:0701