Taxes and labour supply under interdependent preferences

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Taxes and labour supply under interdependent preferences

Author Info

Woźny, Łukasz
Garbicz, Marek

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Lukasz Wozny

Abstract

In this paper we identify how changes in the income tax rate affect the labour supply under interdependent utility functions. To reach that aim we create a model of the economy in which households choosing their optimal labour supply take into account not only their income, tax rate and individual consumption but also so called relative consumption level (Garbicz 1997). Taking into account the last issue we significantly modify the well known Becker model (1965). We conduct a comparative statics exercise using na lattice and supermodular game theory. Thanks to which we show sufficient and necessary conditions for a labour supply to be monotonic function of the income tax rate. We analyze the economic behaviour under static and dynamic setup. Under quite general assumptions concerning the household utility function we show that the higher the tax rate the lower the macroeconomic labour supply. Additionally we show the possibility of multiple equilibria in the economy that offers the explanation of differences in the working time between e.g. European countries and the US as well as discrepancies between micro and macroeconomic elasticity of labour supply (see Alesina, Glaeser, and Sacerdote 2005).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 462.

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Date of creation: Jun 2005
Date of revision: Jun 2005
Handle: RePEc:pra:mprapa:462

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Find related papers by JEL classification:
D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-12-04 (All new papers)
NEP-PBE-2006-12-04 (Public Economics)
NEP-UPT-2006-12-04 (Utility Models & Prospect Theory)

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Edlin, Aaron S. & Shannon, Chris, 1998. "Strict Monotonicity in Comparative Statics," Journal of Economic Theory, Elsevier, vol. 81(1), pages 201-219, July. [Downloadable!] (restricted)
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Other versions:
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Milgrom, P. & Shannon, C., 1991. "Monotone Comparative Statics," Papers 11, Stanford - Institute for Thoretical Economics.
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Daniel John Zizzo, 2003. "Empirical evidence on interdependent preferences: nature or nurture?," Cambridge Journal of Economics, Oxford University Press, vol. 27(6), pages 867-880, November.
Alberto Alesina & Edward Glaeser & Bruce Sacerdote, 2005. "Work and Leisure in the U. S. and Europe: Why so Different?," Harvard Institute of Economic Research Working Papers 2068, Harvard - Institute of Economic Research. [Downloadable!]
Other versions:
- Alberto Alesina & Edward L. Glaeser & Bruce Sacerdote, 2005. "Work and Leisure in the U.S. and Europe: Why So Different?," NBER Working Papers 11278, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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