Self-Control Problems and Conspicuous Housing Consumption:Implications for Tax Policy

During the latest decades, household mortgage loans have increased substantially in many countries. We develop an OLG model where housing is a positional consumption good (such that housing choices are partly driven by relative consumption concerns), and where the consumers are also characterized by a preference for immediate gratification due to quasi-hyperbolic discounting. The purpose is to examine how a paternalistic government may reach its preferred resource allocation through a mix of taxes/subsidies on capital income and housing wealth. Our results show that the optimal policy typically implies a marginal savings-subsidy, while the marginal housing wealth may either be taxed or subsidized. Upward social comparisons imply a possible scenario where the housing wealth of the young generation is subsidized and the housing wealth of the middle-aged generation is taxed at the margin.