Tuesday, December 15, 2009

Incentives to work and save

I always wonder how much of an effect incentives have on these models in the real world. I recognize the theory is legit - if my marginal income tax rate is at 90%, I am not going to do a lot to attract more business. But how much elasticity is there throughout the range? If my income tax rate goes from 20% to 30%, is it going to affect me at all? Especially since withholding is such an amorphous process. I am not sure most people really know what their marginal rate is at the point when they are making work v play decisions.

The incentive to save effect (paradox of thrift) idea I think is more about salience. Right now, everyone is in panic mode. But give us some time to chill out, and I bet most people go right back to overconsumption and running up the Visa bill. I just don't see our culture learning its lesson. Our nucleus accumbans always seems to win out. The chocolate cookies just smell too good to pass up.

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