Technical Report Welfare and Tax Policies in a Neoclassical Growth Model with Non-unitary Discounting

Hori, Takeo  ,  Futagami, Koichi  ,  Ohdoi, Ryoji

15-14pp.1 - 30 , 2015-05 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
In this paper, we propose a neoclassical growth model with non-unitary discounting, where an individual discounts her future utilities from consumption and leisure differently. Because this non-unitary discounting induces the individual's preference reversals, we regard one individual as being composed of different selves. Then we derive the closed-form solution of the recursive competitive equilibrium in which her different selves behave in a time-consistent way in all periods. With regard to welfare analysis, we obtain the following three main results. First, the selves in any period strictly prefer the planning allocation to the laissez-faire allocation if they are given the same value of a state variable in both situations. Second, the selves in the long run can prefer the latter to the former allocation if we focus on the overall equilibrium paths in both situations. Third, a time-consistent tax policy designed by a benevolent government replicates the planning allocation.

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