Abstract This paper studies the heterogeneity of households’ present bias in a heterogeneous-agent model. Our model jointly matches average marginal propensities to consume and wealth distribution USA, even when all is liquid. A fiscal stimulus targeting households bottom half improves consumption response. financial literacy campaign removing gets naive out debt trap but harms sophisticated accumulation due lower equilibrium interest rate. Finally, we show that borrowing cost penalty...

Abstract This paper examines the net benefit accruing to a government when choosing between lower tax rate on future profits and an investment subsidy as stimulation. We hypothesize that either firm or faces Knightian uncertainty in contemplating investment. In presence of firm's uncertainty, prefers cost reduction conventional wisdom prior literature. However, if is concerned about model optimal policy depends varying characteristics reality, such ambiguity level, growth rate, volatility,...

We develop a liquidity management model with dynamic agency. The agent controls short-term investment, which affects the current profitability, and long-term determines firm growth. Regardless of correlation between transitory cash flow permanent growth shocks, optimal contract implements excessive leading to corporate short-termism. Our predicts that distressed firms behave more short-termist higher shocks implement riskier longer-term policies. Moreover, cash-flow sensitivity is...

Abstract We extend an equilibrium business cycle/asset pricing model of production and capital accumulation by introducing wealth‐dependent time preferences. First, we find that the aggregate consumption is no longer proportional to output volatility always lower than output. Second, expected real growth rate increasing in stock, which leads a twin‐peak shape world wealth distribution as shown data. With respect financial markets, show equity risk premium reduced endogenous discounting...

This paper studies leverage dynamics when shareholders commit to optimizing total enterprise value and face debt adjustment friction. Debt costs render the commitment a double-edged sword. High-levered firms benefit from due active repurchase. However, such buyback incurs heavy burden constrains financial flexibility. With high costs, it could be inefficient for maintain firm-optimal policy. Interestingly, incentive alignment effect makes act as if creditors in normal times. For instance,...

We formulate a robust theory of liquidity and risk management based on two fundamental frictions: 1) the entrepreneur cannot alienate his human capital, 2) worries about model uncertainty seek decisions. In line with max-min expected utility, makes decisions under some endogenous worst case, which generates significant distortions for risk-sharing, corporate investment, consumption. With regard to concern ambiguity aversion, optimally responds by lowering maximal debt capacity,...