Working Paper: “Behavioral Bias, Relative to What? Robustness and Discounting in a Bewley Economy”
Abstract:
We construct a linear-quadratic Bewley economy whose consumers differ in their discount factors (patience) and in their concerns about model misspecification (robust-ness). We solve in closed form for a locus on which less patience offsets more robustness, so every consumer’s consumption-saving rule coincides with that of a benchmark con-sumer who fully trusts his model. Any distribution of types on the locus supports the same interest rate and joint distribution of consumption, debt, and income. Quantity data do not separately identify patience and robustness, even when the endowment law is known. Types differ in worst-case forecasts, shadow prices, and welfare evaluations. We bound admissible preference heterogeneity and compute detection error probabil-ities. Measured from the benchmark, every robust consumer looks pessimistic and impatient; measured from another type on the locus, he can look optimistic and pa-tient. Attributing a behavioral bias therefore requires a reference model that quantity data do not select.
Keywords: Bewley model, linear-quadratic economies, multiplier preferences, model uncer-tainty, observational equivalence, identification, behavioral biases.
JEL codes: D81, D84, E21, D52, E71, C61