Working Paper: CEPR ID: DP6776
Authors: Helmuth Cremer; Philippe De Donder; Daro Maldonado; Pierre Pestieau
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.
Keywords: habit formation; myopia; unretiring
JEL Codes: D91; H21; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Habit formation (D10) | Increased future consumption needs (E21) |
| Increased future consumption needs (E21) | Myopia (D84) |
| Myopia (D84) | Insufficient savings (D14) |
| Insufficient savings (D14) | Unretirement (J26) |
| Government intervention (O25) | Improved savings behavior (D14) |