Finance Seminar

Abstract:  I study the consumption-saving decisions of present-biased consumers. Building on Harris and Laibson (2013), continuous-time methods enable present bias to be tractably incorporated into consumption-saving models featuring stochastic income, multiple assets with varying return and liquidity properties, and high-cost borrowing. In this rich environment I present closed-form expressions characterizing the effect of present bias on consumption, illiquid asset demand, and welfare. This welfare analysis specifies the channels through which present bias can matter for policy, and uncovers "the present-bias dilemma": present bias has large welfare costs, but individuals have little ability to alleviate these costs without government intervention.