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1 results

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

  • Yuan Li, Jinqiang Yang, Siqi Zhao
  • Journal:
    Macroeconomic Dynamics / Volume 29 / 2025
    Published online by Cambridge University Press:
    19 December 2024, e63
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  • 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.