On Optimal Lifetime Redistribution Policy

Abstract

Abstract:In this paper we examine various aspects of the optimal lifetime redistribution policy within a cohort. We characterise optimal redistribution policy when society consists of individuals who do not differ only in productivity, but also in time preference or myopia. We extend Diamond's (2003) analysis on nonlinear taxation of savings into the three and four type models. Our results provide a rationale for distortions (upward and downward) in savings behaviour in a simple two period model where high skilled and low skilled individuals have different non-observable time preferences beyond their earning capacity. If we interpret our model so that there is no private savings, but public provision of pension in period 2, then in different versions (and different parameterization) of three type model we find the U-shaped pattern of the replacement rates. Our numerical results suggest that the retirement consumption is less dispersed than the first period consumption in a paternalistic case, whereas in a welfarist case the ordering is reversed. Our numerical simulations also show that consumption when old should be less dispersed than consumption when young when some individuals are myopic. Moreover our numerical results suggest that when there are myopic individuals in the economy, a paternalistic government policy increases saving and makes saving larger than with paternalist government policy where there are no myopic individuals.

Dynamic nonlinear income taxation with quasi-hyperbolic discounting and no commitment

“…The models examined by Golosov, et al (2013), Tenhunen and Tuomala (2010), and Diamond and Spinnewijn (2011) all assume full commitment, but individuals are distinguished by both skills and their preferences for savings. As the government observes neither skills nor preferences, it faces a two-dimensional screening problem.…”

Prodigality and Myopia—two Rationales for Social Security*

“…(2001), Diamond and Koszegi (2003), Cremer et al. (2006) and Tenhunen and Tuomala (2006). See also Cremer et al.…”

Capital taxation with parental incentives

“…The endogenous political time preference is a key departure from the literature on optimal taxation by paternalistic governments, such as Tenhunen and Tuomala (2010). In their Mirrleesean income taxation model, Tenhunen and Tuomala consider two types of government: welfarist (utilitarian) which respects the individuals' time preferences, and paternalistic, which has an exogenously given political time preference.…”