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Can Optimism be a Remedy for Present Bias?

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  • MINWOOK KANG
  • LEI SANDY YE

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.

Suggested Citation

  • Minwook Kang & Lei Sandy Ye, 2021. "Can Optimism be a Remedy for Present Bias?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(1), pages 201-231, February.
    • Handle: RePEc:wly:jmoncb:v:53:y:2021:i:1:p:201-231
    DOI: 10.1111/jmcb.12726
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    References listed on IDEAS

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    Cited by:

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    3. Jin, Lawrence & Kang, Minwook, 2023. "Human-capital investments as a commitment device," Economic Modelling, Elsevier, vol. 126(C).

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