Present-bias and externalities: Can government intervention raise welfare?

Abstract

Quasi-hyperbolic discounted preferences imply that consumers overemphasize immediate current rewards and overlook future ones (they have a ‘bias for the present’). Within this context the literature has emphasized that the misalignment between immediate and future rewards can be rectified by government policy. Importantly, it has also been shown that intervention by a government which shares the same biased intertemporal preferences with consumers does not deliver welfare improvements. Focusing on the latter, this paper identifies conditions under which in the presence of quasi-hyperbolic preferences, and a market imperfection (which takes the form of a negative externality), intervention by a present-biased government is welfare enhancing. This is the case if the market imperfection is sufficiently strong or the consumers’ bias for the present is weak.