Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 828: State-Variable Public Goods When Relative Consumption Matters: A Dynamic Optimal Taxation Approach
Thomas Aronsson () and Olof Johansson-Stenman ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Olof Johansson-Stenman: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Postal: SE – 405 30 Göteborg, Sweden
Abstract: This paper concerns the optimal provision of a state-variable public good, where the global climate is the prime example. The analysis is based on a two-type optimal income tax model with overlapping generations, where people care about their relative consumption. We consider both keeping-up-with-the-Joneses preferences (where people compare their own current consumption with others’ current consumption) and catching-up-with-the-Joneses preferences (where people compare their own current consumption with others’ past consumption). The extent to which the rule for public provision ought to be modified is shown to depend crucially on the preference elicitation format.
Keywords: State variable public goods; asymmetric information; relative consumption; status; positional preferences; climate policy
44 pages, June 20, 2011
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