General Equilibrium Tax Policy with Hyperbolic Consumers

Toke Ward Petersen

No 189, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: Recently David Laibson (1998) and others have argued in favor of using hyperbolic discount functions. The purpose of this paper is to investigate whether conventional wisdom, based on the standard model with exponential discounting, also holds in the case where consumers have hyperbolic discount functions. In other words do hyperbolic preferences matter for practical policy evaluation? Within the framework of a suitably modified standard General Equilibrium model a la Auerbach and Kotlikoff (1987), this is done by simulations of both fundamental changes in the tax base, as well as more marginal experiments comparing the excess burden of taxation. Based on the simulations it turns out that the answer to the question is a maybe: if preferences are sufficiently hyperbolic then policy conclusions change. Unfortunately this degree of hyperbolicness in the discounting function is at the level that is considered realistic by empirical studies.

Keywords: hyperbolic discounting; tax reform (search for similar items in EconPapers)
JEL-codes: C68 D91 E21 H21 (search for similar items in EconPapers)
Date: 2001-04-01
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf1:189

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