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Consumption externalities, market imperfections and optimal taxation
Author(s) -
Chang Juinjen,
Chen Jhyhwa,
Shieh Jhyyuan
Publication year - 2012
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2012.00197.x
Subject(s) - keeping up with the joneses , economics , microeconomics , social planner , consumption (sociology) , externality , preference , planner , elasticity of substitution , commit , optimal tax , production (economics) , growth model , social science , database , sociology , computer science , programming language
In a dynamic model with a keeping‐up‐with‐the Joneses preference and market imperfections, we attempt to investigate under what circumstances and for what reason the optimal tax should be state‐varying. We extend the Ljungqvist and Uhlig (2000) proposition to include preferences that exhibit non‐homotheticity. We show that a keeping‐up‐with‐the‐Joneses preference (a non‐intertemporally‐dependent preference) can lead the social planner to commit to a state‐contingent tax on labor income. Moreover, the optimal labor income tax can be either procyclical or countercyclical with respect to economic fluctuations, this crucially depending on whether the level of contemporaneous consumption increases or decreases the wedge between the intertemporal substitution elasticity of households and of the social planner.