Sin Licenses Revisited

Markus Haavio
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Markus Haavio: Department of Economics, Turku School of Economics, 20014 University of Turku, Finland
Authors registered in the RePEc Author Service: Markus Haavio

No 75, Discussion Papers from Aboa Centre for Economics

Abstract: We analyse attempts to implement personalised regulation in the form of sin licenses (O'Donoghue and Rabin 2003, 2005, 2007) to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We take into account the possibility that consumers may trade the sin good in a secondary market, and show that sin licenses induce only sophisticated individuals with low levels of self-control problems to consume optimally. The consumption of naive individuals as well as sophisticated individuals with severe self-control problems remains too high, and welfare in equilibrium is decreasing in the level of self-control problems and non-increasing in the level of naivete. Further, we show that introducing a uniform tax on top of a system of sin licenses may improve welfare, whereas a uniform maximum quota would reduce welfare for sophisticates but may increase welfare for naives. Finally, we show that naives would benefit from a scheme where sin licenses are sold for a positive price in the primary market.

Keywords: self-control problems; sin licenses; secondary markets (search for similar items in EconPapers)
JEL-codes: H21 H30 I18 (search for similar items in EconPapers)
Pages: 54
Date: 2012-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Sin Licenses Revisited (2012)
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