IDEP Conferences, 11th journées Louis-André Gérard-Varet

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Sin licenses revisited
Markus Haavio, Kaisa Kotakorpi

Last modified: 2012-05-11

Abstract


We analyse attempts to implement personalised regulation in the form of sin licenses (O'Donoghue and Rabin 2003, 2005, 2007) to correct the distortion in the consumption of a harmful good when consumers suffer from varying degrees of self-control problems. We show that if there is a secondary market for the sin good, sin licenses can induce sophisticated individuals with low levels of self-control problems to consume optimally, whereas the consumption of individuals with severe self-control problems remains too high. Sin licenses therefore fail
for precisely those individuals who would bene?t most from regulation. Further, we show that introducing a uniform tax on top of a system of sin licenses may improve welfare, whereas a uniform maximum quota would reduce welfare. We also examine the implications of partial naivete and show that partially naive
individuals are worse o¤ under sin licenses than sophisticates. It is nevertheless possible that the system of sin licenses fails completely even when all individuals are very close to being sophisticated.

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