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Present bias and endogenous fiscal deficits: Revisiting Woo (2005)

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  • Shinya Tsukahara

    (Kyoto University of Foreign Studies)

Abstract

This study examines a dynamic game of governmental budgeting by introducing policymakers' dynamically inconsistent preferences with present bias (i.e., quasi-hyperbolic discounting) into the game considered by Woo (2005, "Social polarization, fiscal instability and growth," European Economic Review, 49, 1451-1477). Under a condition with a plausible economic interpretation, we show that our game has the same non-cooperative equilibrium as that of a discrete-time version of Woo (2005) in which two policymakers have dynamically consistent preferences (i.e., exponential discounting). This result suggests that when analyzing endogenous fiscal deficits, it is not too restrictive to assume that the policymakers' discounting is exponential.

Suggested Citation

  • Shinya Tsukahara, 2019. "Present bias and endogenous fiscal deficits: Revisiting Woo (2005)," Economics Bulletin, AccessEcon, vol. 39(3), pages 1666-1676.
    • Handle: RePEc:ebl:ecbull:eb-19-00447
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    References listed on IDEAS

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    More about this item

    Keywords

    Quasi-hyperbolic discounting; Present bias; Fiscal deficits; Dynamic game;
    All these keywords.

    JEL classification:

    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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