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Report, 2021

Working hours, status consumption, and optimal taxation

Hart, Robert


We build a growth model focusing exclusively on household choices, including both pollution  and consumption externalities.The consumption of status goods helps to motivate labour supply, and the importance of this effect increases as productivity increases.This accounts for two  stylized facts: firstly, although labour supply declines with income at low incomes (both for timeseries and cross-sectional countrydata, and for cross-sectional individual data), the decline levels off at high incomes; and secondly, that expenditure tends to shift towards energy- and resource-intensive goods with rising income. To achieve first best—withalong-run increase in leisure and decline in pollution—taxes on both emissions and status goods should  increase with productivity. When we parameterize the model to match patterns of labour supplya crossleading economies, the shift of taxation to status goods causes a significant drop in labour supply, and an even larger drop in polluting emissions.

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Working Paper Series / Swedish University of Agricultural Sciences, Department of Economics
2021, number: 2021:01
Publisher: Swedish University of Agricultural Sciences, Department of Economics

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