Bad Luck or Bad Decisions? Macroeconomic Implications of Persistent Heterogeneity in Cognitive Skills and Overconfidence

Oliver Pfäuti, Fabian Seyrich and Jonathan Zinman

No 2080, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: Business cycle models often abstract from persistent household heterogeneity, despite its potentially significant implications for macroeconomic fluctuations and policy. We show empirically that the likelihood of being persistently financially constrained decreases with cognitive skills and increases with overconfidence thereon. Guided by this and other micro evidence, we add persistent heterogeneity in cognitive skills and overconfidence to an otherwise standard HANK model. Overconfidence proves to be the key innovation, driving households to spend instead of precautionary save and producing empirically realistic wealth distributions and hand-to-mouth shares and MPCs across the income distribution. We highlight implications for various fiscal policies.

Keywords: Household heterogeneity; cognitive skills; overconfidence; financial constraints; fiscal policy; HANK (search for similar items in EconPapers)
JEL-codes: D91 E21 E62 E71 G51 (search for similar items in EconPapers)
Pages: 50 p.
Date: 2024
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-inv, nep-mac and nep-neu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Bad Luck or Bad Decisions? Macroeconomic Implications of Persistent Heterogeneity in Cognitive Skills and Overconfidence (2024)
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