Hyperbolic discounting and uniform savings floors

No 2007-59, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Previous research suggests that, in partial equilibrium, individuals whose decision-making exhibits a present-bias--such as hyperbolic discounters who tend to over-consume--will be in favor of having a floor imposed on their savings. In this paper, I show it is quite difficult for the introduction of a savings floor to be Pareto-improving in general equilibrium. Indeed, a necessary condition for the floor to be Pareto-improving is that it is high enough to be binding for all individuals. Even in that case, because the equilibrium interest rate is affected by the level of the savings floor, some individuals may prefer to commit to a future time path of consumption by facing a high interest rate (and no floor) rather than a high floor.

Keywords: Saving; and; investment (search for similar items in EconPapers)
Date: 2007
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