Can Optimism be a Remedy for Present Bias?

Minwook Kang and Lei Sandy Ye

Journal of Money, Credit and Banking, 2021, vol. 53, issue 1, 201-231

Abstract: Under economies with hyperbolic preferences, vast research has investigated welfare‐improving tax policies to resolve capital misallocation issues. In this paper, we suggests an alternative channel to overcome a form of this issue associated with consumer's present bias—optimism, as defined by overexpectation of future productivity. We show that even though optimism negatively impacts consumers under normal circumstances, a moderate level of it can be beneficial when consumers have hyperbolic preferences. On the other hand, pessimism always negatively impacts consumer welfare. A steady‐state analysis shows that the quantitative impact of optimism on welfare can be sizable.

Date: 2021
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https://doi.org/10.1111/jmcb.12726

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:53:y:2021:i:1:p:201-231

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