Internalities and paternalism: applying the compensation criterion to multiple selves across time

One reason to call an activity a vice and suppress it is that it reduces a person’s future happiness more than it increases his present happiness. Gruber & Koszegi (2001) show how a vice tax can increase a person’s welfare in a model of multiple selves with hyperbolic preferences across time. An interself analogy of the compensation criterion can justify a vice ban whether preferences are hyperbolic or exponential, but subject to the caveat that the person has a binding constraint on borrowing. The puzzles that intrapersonal altruism raises, however, lend support to using the “Marshallian” wealth maximization criterion of Friedman (1988) instead of the Kaldor-Hicks criterion. Dan R. and Catherine M. Dalton Professor, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University. visitor (07/08), Nuffield College, Oxford University. Office: 011-44-1865 554-163 or (01865) 554-163. Nuffield College, Room C3, New Road, Oxford, England, OX1 1NF. [email protected]. http://www.rasmusen.org. This paper: http: //www.rasmusen.org/papers/internality-rasmusen.pdf.