Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/68204 
Year of Publication: 
2012
Series/Report no.: 
CESifo Working Paper No. 4010
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
self-control problems
sin licenses
secondary markets
JEL: 
H21
H30
I18
Document Type: 
Working Paper
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