Sin Licenses Revisited

51 Pages Posted: 5 Dec 2012

See all articles by Markus Haavio

Markus Haavio

Bank of Finland - Research

Kaisa Kotakorpi

University of Turku - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 30, 2012

Abstract

We analyze attempts to implement personalized 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 take into account the possibility that consumers may trade the sin good in a secondary market, and show that sin licenses induce only sophisticated individuals with low levels of self-control problems to consume optimally. The consumption of naïve individuals as well as sophisticated individuals with severe self-control problems remains too high, and welfare in equilibrium is decreasing in the level of self-control problems and non-increasing in the level of naivete. 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 for sophisticates but may increase welfare for naives. Finally, we show that naives would benefit from a scheme where sin licenses are sold for a positive price in the primary market.

Keywords: self-control problems, sin licenses, secondary markets

JEL Classification: H210, H300, I180

Suggested Citation

Haavio, Markus and Kotakorpi, Kaisa, Sin Licenses Revisited (November 30, 2012). CESifo Working Paper Series No. 4010, Available at SSRN: https://ssrn.com/abstract=2184719

Markus Haavio

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Kaisa Kotakorpi (Contact Author)

University of Turku - Department of Economics ( email )

Turku
Finland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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