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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: zhaosiqi.shufe@gmail.com
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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

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

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