Present bias and endogenous fiscal deficits: Revisiting Woo (2005)

Shinya Tsukahara ()
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Shinya Tsukahara: Kyoto University of Foreign Studies

Economics Bulletin, 2019, vol. 39, issue 3, 1666-1676

Abstract: This study examines a dynamic game of governmental budgeting by introducing policymakers' dynamically inconsistent preferences with present bias (i.e., quasi-hyperbolic discounting) into the game considered by Woo (2005, "Social polarization, fiscal instability and growth," European Economic Review, 49, 1451-1477). Under a condition with a plausible economic interpretation, we show that our game has the same non-cooperative equilibrium as that of a discrete-time version of Woo (2005) in which two policymakers have dynamically consistent preferences (i.e., exponential discounting). This result suggests that when analyzing endogenous fiscal deficits, it is not too restrictive to assume that the policymakers' discounting is exponential.

Keywords: Quasi-hyperbolic discounting; Present bias; Fiscal deficits; Dynamic game (search for similar items in EconPapers)
JEL-codes: E6 H6 (search for similar items in EconPapers)
Date: 2019-07-07
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