Pareto-improving tax policies under hyperbolic discounting

  • Minwook KangEmail author


This paper investigates the welfare implications of tax policies in the economy with present-biased consumers. We show that consumption taxes, income subsidies, or capital subsidies can improve not only hyperbolically discounted intertemporal utilities, but also exponentially discounted commitment utilities. This finding implies that both consumers and the government can have incentives to adopt tax policies against present-biased decisions. All the results are shown in a three-period model with general utility and production functions. A steady-state analysis indicates that the proposed tax policy is effective in recovering the welfare/capital loss due to consumers’ present bias.


Present bias Hyperbolic discounting Pareto-improving tax policies Long-term perspective preferences Steady-state analysis 

JEL Classification

E03 E21 H21 


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© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Division of Economics, School of Social SciencesNanyang Technological UniversitySingaporeSingapore

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