Working Paper: CEPR ID: DP6777
Authors: Helmuth Cremer; Philippe de Donder; Daro Maldonado; Pierre Pestieau
Abstract: We consider a two-period model. In the first period, individuals consume two goods: one is sinful and the other is not. The sin good brings pleasure but has a detrimental effect on second period health and individuals tend to underestimate this effect. In the second period, individuals can devote part of their saving to improve their health status and thus compensate for the damage caused by their sinful consumption. We consider two alternative specifications concerning this second period health care decision: either individuals acknowledge that they have made a mistake in the first period out of myopia or ignorance, or they persist in ignoring the detrimental effect of their sinful consumption. We study the optimal linear taxes on sin good consumption, saving and health care expenditures for a paternalistic social planner. We compare those taxes in the two specifications. We show under which circumstances the first best outcome can be decentralized and we study the second best taxes when saving is unobservable.
Keywords: behavioral economics; dual vs single self; paternalism
JEL Codes: H21; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Taxing sin goods (H29) | Internalizing health costs (H51) |
| Subsidizing health care (H51) | Compensating for underestimation of benefits (J32) |
| Sin good consumption (L66) | Health outcomes (I14) |
| Health outcomes (I14) | Health care expenditures (H51) |
| Optimal tax rates (H21) | Effectiveness of policies (F68) |
| Degree of myopia (C29) | Optimal tax rates (H21) |
| Persistent ignorance (D83) | Adjustment of health care expenditures (H51) |