Hyperbolic Discounting And Uniform Savings Floors
Source: Federal Reserve Board
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, the author shows it is quite difficult for the introduction of a savings floor to be Pareto-improving in general equilibrium. Indeed, a necessary condition for floor to be Pareto-improving is that it is high enough to be binding for all individuals. Even in that case, because equilibrium interest rate is affected by the level of 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.