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A Non‐unitary Discount Rate Model
Author(s) -
Hori Takeo,
Futagami Koichi
Publication year - 2019
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/ecca.12250
Subject(s) - consumption (sociology) , economics , subsidy , unitary state , welfare , microeconomics , time preference , consumption tax , econometrics , public economics , indirect tax , tax reform , social science , sociology , political science , law , market economy
We develop a simple macroeconomic model in which agents discount their utility from consumption and the utility from leisure at different rates. Under this setting, time‐inconsistency emerges for the preferences of agents. Moreover, the time‐inconsistency problem generates two types of inefficiencies: intratemporal and intertemporal. We examine the welfare effects of savings subsidy and consumption tax. The effects of taxation in our model are quite different from those in the standard model. If the discount rate for consumption is higher (lower) than that for leisure, today's self cares less (more) about the consumption of the future selves than the leisure of the future selves. Depressing (stimulating) the consumption of future selves improves the utility of today's self. Hence a positive (negative) consumption tax rate improves the utility level of all selves.