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Present-biased heterogeneity, marginal propensity to consume, and wealth distribution

Published online by Cambridge University Press:  19 December 2024

Yuan Li ,
Jinqiang Yang  and
Siqi Zhao
Yuan Li
Affiliation:
School of Finance, Shanghai University of Finance and Economics, Shanghai, China
Jinqiang Yang
Affiliation:
School of Finance, Fullgoal Institute for ESG Research, Shanghai University of Finance and Economics, Shanghai Institute of International Finance and Economics, Shanghai, China
Siqi Zhao*
Affiliation:
School of Economics, Fudan University, Shanghai, China Shanghai Institute of International Finance and Economics, Shanghai, China
*
Corresponding author: Siqi Zhao; Email: [email protected]
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Abstract

This paper studies the heterogeneity of households’ present bias in a heterogeneous-agent model. Our model jointly matches the average marginal propensities to consume and the wealth distribution in the USA, even when all wealth is liquid. A fiscal stimulus targeting households in the bottom half of the wealth distribution improves the consumption response. A financial literacy campaign removing present bias gets naive households out of the debt trap but harms sophisticated households’ wealth accumulation due to a lower equilibrium interest rate. Finally, we show that a borrowing cost penalty and illiquidity both discipline excessive borrowing and are therefore potential remedies for present bias and naivete.

Keywords

Present biasmarginal propensity to consumewealth distributionD31D91E21
Type
Articles
Information
Macroeconomic Dynamics , Volume 29 , 2025 , e63
Copyright
© The Author(s), 2024. Published by Cambridge University Press

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