Article
Version 2
Preserved in Portico This version is not peer-reviewed
Unrealistic Optimism and Early Recessions
Version 1
: Received: 25 January 2024 / Approved: 25 January 2024 / Online: 25 January 2024 (10:43:06 CET)
Version 2 : Received: 28 March 2024 / Approved: 29 March 2024 / Online: 29 March 2024 (17:05:47 CET)
Version 3 : Received: 3 April 2024 / Approved: 3 April 2024 / Online: 4 April 2024 (17:37:48 CEST)
Version 2 : Received: 28 March 2024 / Approved: 29 March 2024 / Online: 29 March 2024 (17:05:47 CET)
Version 3 : Received: 3 April 2024 / Approved: 3 April 2024 / Online: 4 April 2024 (17:37:48 CEST)
How to cite: Doh, H. S.; Pan, J. Unrealistic Optimism and Early Recessions. Preprints 2024, 2024011826. https://doi.org/10.20944/preprints202401.1826.v2 Doh, H. S.; Pan, J. Unrealistic Optimism and Early Recessions. Preprints 2024, 2024011826. https://doi.org/10.20944/preprints202401.1826.v2
Abstract
In this paper, we consider an economy, in which consumers exhibit unrealistic optimism, and show that such an economy is more likely to undergo early recessions and underinvestment rather than experiencing bubbles or overinvestment. In this model, each consumer incorrectly believes that a negative aggregate preference shock will hit all other consumers, but not herself. When consumers have such an unrealistic optimism, the output price must fall prematurely before the aggregate shock occurs. The reason is that if the price does not plummet today, all consumers would postpone making purchases by falsely expecting that an arbitrage opportunity will arise in the future when the aggregate shock hits the economy, in which case, the output market cannot clear. We also show that the government has the potential to improve welfare of the economy by providing subsidies, if the government judiciously selects the right timing for intervention.
Keywords
unrealistic optimism; recessions; market collapse; government intervention
Subject
Social Sciences, Behavior Sciences
Copyright: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Comments (0)
We encourage comments and feedback from a broad range of readers. See criteria for comments and our Diversity statement.
Leave a public commentSend a private comment to the author(s)
* All users must log in before leaving a comment