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Fiscal policy as a temptation control device: Savings subsidy and social security

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  • Tran, Chung

Abstract

In an environment where individuals suffer from temptation and self-control problems, there are induced preferences for commitment devices. We show that the savings subsidy and social security programs can be properly designed to mitigate the adverse effect of succumbing to temptation and release severity of self-control. Moreover, we disentangle the mechanics behind the two fiscal programs and find that the driving forces are quite different. Welfare gains associated with a social security program result mainly from releasing self-control costs. Conversely, welfare gains associated with a savings subsidy program are mainly driven by mitigating inter-temporal allocation distortions. Interestingly, the direction and size of welfare effects vary substantially when general equilibrium channels are in play. Our results have implications for designing an effective temptation control device using fiscal policy.

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  • Tran, Chung, 2016. "Fiscal policy as a temptation control device: Savings subsidy and social security," Economic Modelling, Elsevier, vol. 55(C), pages 254-268.
    • Handle: RePEc:eee:ecmode:v:55:y:2016:i:c:p:254-268
    DOI: 10.1016/j.econmod.2016.02.021
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    Cited by:

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    3. Justin van de Ven, 2017. "Exploring the Importance of Incentive Responses for Policy Projections," International Journal of Microsimulation, International Microsimulation Association, vol. 10(3), pages 134-164.
    4. Arvaniti, Maria & Sjögren, Tomas, 2023. "Temptation in consumption and optimal taxation," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 687-707.
    5. van de Ven, Justin, 2017. "SIDD: An adaptable framework for analysing the distributional implications of policy alternatives where savings and employment decisions matter," Economic Modelling, Elsevier, vol. 63(C), pages 161-174.

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