Hand-to-mouth Consumption and Calorie Consciousness: Consequences for Junk-food Taxation

Abstract

Junk-food taxes have mixed effects on obesity and junk-food consumption. We build a theoretical model to explain empirical results and better understand how to address the obesity crisis. In our framework, hand-to-mouth consumers make an intertemporal choice between junk-food consumption and weight loss. Their choice depends on calorie consciousness, which is influenced by perceived after-tax relative prices and educational attainment. Thus, a junk-food tax modifies consumers’ intertemporal choice both through their budget constraint and calorie consciousness. As a result, the effect of the tax on body weight reflects competing income, intertemporal substitution, and calorie-consciousness effects. The model explains empirical observations such as the recent rise in obesity and differences in weight outcomes for different income levels. The model explains circumstances under which junk-food taxes can be effective or ineffective to reduce body weight as well as differences in elasticities of high-calorie food consumption for high- and low-income earners.