Working Paper: NBER ID: w10345
Authors: Jay Bhattacharya; Darius Lakdawalla
Abstract: Self-control devices, such as rehabilitation programs, group commitment, and informal fines, can make time-inconsistent smokers better off. Health economists have used this result to argue in favor of cigarette taxes that restrain smoking. However, taxes alone are not Pareto-improving overall, because they benefit today's smoker at the expense of her future selves, who have less demand for self-control. We suggest an alternative class of taxation policies that provide selfcontrol and benefit a smoker at every point in life. Smokers could be allowed to purchase smoking licenses' when they start to smoke, and in exchange commit their future selves to face compensated cigarette taxes. We show that this scheme which could be made voluntary improves the welfare of current and future smokers, generates positive revenue for the government, and can be made incentive-compatible. Similar schemes can also be envisioned to address problems of timeinconsistency in other contexts.
Keywords: Time Inconsistency; Welfare; Self-Control; Smoking Licenses
JEL Codes: I1; H2; D6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| self-control devices (D91) | welfare of time-inconsistent smokers (D15) |
| traditional taxation methods (H29) | welfare of future selves of smokers (I12) |
| smoking license scheme (D45) | welfare of time-inconsistent individuals (D15) |
| smoking license scheme (D45) | positive revenue for the government (H27) |
| smoking license scheme (D45) | incentive compatibility (D82) |