Hyperbolic Discounting and Uniform Savings Floors
33 Pages Posted: 4 Dec 2007
Date Written: 2007
Previous research suggests that, in partial equilibrium, individuals whose decision-making exhibits a present-bias-such as hyperbolic discounters who tend to over-consume will be in favor of having a floor imposed on their savings. In this paper, I show it is quite difficult for the introduction of a savings floor to be Pareto-improving in general equilibrium. Indeed, a necessary condition for the floor to be Pareto-improving is that it is high enough to be binding for all individuals. Even in that case, because the equilibrium interest rate is affected by the level of the savings floor, some individuals may prefer to commit to a future time path of consumption by facing a high interest rate (and no floor) rather than a high floor.
Keywords: Hyperbolic discounting, general equilibrium, commitment
JEL Classification: E21, H4, H55
Suggested Citation: Suggested Citation