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Present bias and externalities: Can government intervention raise welfare?

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  • Christos Kotsogiannis
  • Robert Schwager

Abstract

Quasi‐hyperbolic discounted preferences imply that consumers overemphasize immediate current rewards and overlook future ones (they have a “bias for the present”). Within this context the literature has emphasized that the misalignment between immediate and future rewards can be rectified by government policy. Importantly, it has also been shown that intervention by a government that shares the same biased intertemporal preferences with consumers does not deliver welfare improvements. Focusing on the latter, this paper identifies conditions under which, in the presence of quasi‐hyperbolic preferences and a market imperfection (which takes the form of a negative externality), intervention by a present‐biased government is welfare enhancing. This is the case if the market imperfection is sufficiently strong or the consumers' bias for the present is weak. Biais en faveur du présent et effets externes : l'intervention du gouvernement peut‐elle rehausser le bien‐être? Les préférences quasi hyperboliques laissent croire que les consommateurs mettent trop l'accent sur les récompenses actuelles immédiates et qu'ils négligent les récompenses futures (ils ont un « biais en faveur du présent »). Dans ce contexte, la littérature a souligné que le décalage entre les récompenses immédiates et les récompenses futures peut être corrigé par la politique gouvernementale. Fait important, il a également été démontré qu'une intervention par un gouvernement qui partage les mêmes préférences intertemporelles biaisées que les consommateurs n'engendre pas d'améliorations du bien‐être. Mettant l'accent sur ce dernier aspect, cet article détermine les conditions dans lesquelles, en présence de préférences quasi hyperboliques et d'une imperfection du marché (qui prend la forme d'un effet externe négatif), une intervention par un gouvernement biaisé en faveur du présent permet de rehausser le bien‐être. C'est le cas si l'imperfection du marché est suffisamment puissante ou si le biais des consommateurs en faveur du présent est faible.

Suggested Citation

  • Christos Kotsogiannis & Robert Schwager, 2022. "Present bias and externalities: Can government intervention raise welfare?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(3), pages 1480-1506, August.
    • Handle: RePEc:wly:canjec:v:55:y:2022:i:3:p:1480-1506
    DOI: 10.1111/caje.12572
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