Implications of non-standard preferences on religious giving, alternative banking, and optimal taxation

Abstract

This thesis consists of three papers studying the economic implications of non-standard preferences on religious giving, alternative banking, and optimal taxation. The first paper (Chapter 2) compares a type of religious giving from the rich to the poor with other fiscal policies in terms of economic aggregates and social welfare. The second paper (Chapter 3) aims to answer under what conditions an alternative banking system would arise and what are the growth and welfare implications of these systems. The third paper (Chapter 4) examines the impact of self-control problems on individuals' economic decisions and how public finance instruments could be used to correct anomalies created by temptation. The first paper sets up a framework for an economy with religious giving from the rich to the poor. We highlight its impact on economic aggregates and social welfare. These characteristics are incorporated into an overlapping generations model. We compare religious giving with other intergenerational fiscal policies that have redistributive impact. Results show that when people have standard preferences, Zakat (a type of Islamic religious giving) although enhances redistribution, may not be the choice in terms of total welfare. But when individuals are risk adverse and have After-life concerns, Zakat enhances both redistribution and total welfare due to the higher steady state capital. The second paper examines the issue that a significant number of individuals are unwilling to deposit their savings into the banking sector since it does not operate according to their religious beliefs. In this paper we aim to answer the following questions: First, under what conditions an alternative banking system would arise? Second, what are the growth, and welfare implications of these banking systems? Our model shows that an alternative banking system would arise if individuals have religious concerns. Moreover, we show that in an economy populated with some religiously concerned individuals, the existence of an alternative banking system can generate relatively higher growth and improve welfare. The third paper investigates self-control problems as it is an important determinant of individuals' economic decisions. The decision maker's future utility is affected by unwanted temptation. Various government policies would differ if one incorporates these behavioral aspects. Public finance instruments could, however, be used to correct anomalies created by temptation. In order to capture our agents' temptation towards current consumption, our model makes use of the preference structure pioneered by Gul and Pesendorfer (2001) and further elaborated by Krusell et al. (2010) in the context of optimal taxation. We extend by adding labor choice and besides savings tax, we also analyze capital income tax, consumption tax and labor income tax. Results show that when the analysis is restricted to logarithmic preferences separable in consumption and labor supply, the government should subsidize either capital income or investment as it maximizes both an individual's commitment utility for consumption and labor supply at the same time. Because individuals consume and supply labor more than their commitment utility, subsidizing improves welfare as it makes temptation less attractive.