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Title:Habit formation and labor supply PDF Logo
Authors:Cremer, Helmuth
de Donder, Philippe
Maldonado, Darío
Pestieau, Pierre
Issue Date:2008
Series/Report no.:CESifo working paper 2351
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.
Subjects:Habit formation
myopia
unretiring
JEL:D91
H21
H55
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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