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On Habit and the Socially Efficient Level of Consumption and Work Effort

Author

Listed:
  • Paul Levine

    (University of Surrey)

  • Peter McAdam

    (University of Surrey and European Central Bank)

  • Peter Welz

    (European Central Bank)

Abstract

We study relative preferences in a general equilibrium model where households make social comparisons and/or get habituated to levels of labour-effort they supply and goods they consume. Bayesian estimations for the US support the existence of a society based on such preferences. In particular, there is evidence that households a) make social comparisons and form habituation patterns in consumption and b) face peer-pressure when supplying labour and are aversely affected by it. Using our empirical estimates we provide numerical results for the optimal tax levels that correct for ine fficiencies generated by relative preferences and distortions in product and labour markets. Owing to the latter, we find weak support for `corrective' taxation as a way of mitigating the ine fficiencies generated by such preferences.

Suggested Citation

  • Paul Levine & Peter McAdam & Peter Welz, 2013. "On Habit and the Socially Efficient Level of Consumption and Work Effort," School of Economics Discussion Papers 0713, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0713
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    File URL: https://repec.som.surrey.ac.uk/2013/DP07-13.pdf
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    References listed on IDEAS

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    2. Hamermesh, Daniel S. & Kawaguchi, Daiji & Lee, Jungmin, 2017. "Does labor legislation benefit workers? Well-being after an hours reduction," Journal of the Japanese and International Economies, Elsevier, vol. 44(C), pages 1-12.

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    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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