Myopia, Regrets and Risky Behaviors
Abstract
This paper examines how a government should intervene when agents make choices having long-term detrimental effects on their life expectancy. For that purpose, we consider an economy where some agents consume a sin good (reducing their survival chances) out of myopia, and regret their choices later on, whereas other agents make, because of their impatience, the same risky choices, which they never regret. We argue that, in the first-best, a government should only interfere with behaviors that agents will regret, but not with other behaviors. In the second-best, asymmetric information and redistributive concerns imply interferences not only with myopic behaviors, but also with impatience-based (rational) behaviors. Finally, we introduce heterogeneity in individual earnings, and show that the optimal tax on the sin good depends on the size of the myopic group, on the reactivity of sin good consumption to tax changes, and on the extent to which sin good consumption is correlated with labor earnings.