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Shinya Tsukahara
''Present bias and endogenous fiscal deficits: Revisiting Woo (2005)''
( 2019, Vol. 39 No.3 )
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.
Keywords: Quasi-hyperbolic discounting, Present bias, Fiscal deficits, Dynamic game
JEL: H6 - National Budget, Deficit, and Debt: General
E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
Manuscript Received : May 15 2019 Manuscript Accepted : Jul 07 2019

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