| Abstract: | Under economies with hyperbolic preferences, vast research has investigated welfare‐improving tax policies to resolve capital misallocation issues. In this paper, we suggests an alternative channel to overcome a form of this issue associated with consumer's present bias—optimism, as defined by overexpectation of future productivity. We show that even though optimism negatively impacts consumers under normal circumstances, a moderate level of it can be beneficial when consumers have hyperbolic preferences. On the other hand, pessimism always negatively impacts consumer welfare. A steady‐state analysis shows that the quantitative impact of optimism on welfare can be sizable. |
