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Temptation and the efficient taxation of education and labor
Author(s) -
Bethencourt Carlos,
Kunze Lars
Publication year - 2017
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12160
Subject(s) - temptation , subsidy , economics , earnings , microeconomics , labour economics , function (biology) , market economy , finance , psychology , social psychology , evolutionary biology , biology
This paper studies efficient tax policies in Ramsey's tradition when consumers face temptation and self control problems in intertemporal decision making. We embed the class of preferences developed by Gul and Pesendorfer into a simple two‐period life‐cycle model and show that education should be effectively subsidized if the elasticity of the earnings function is increasing in education and if temptation problems are sufficiently severe. By contrast, if temptation problems are not sufficiently severe, efficient education policy calls for taxing education. Moreover, efficient labor taxation calls for subsidizing qualified labor if the strength of temptation is sufficiently large.