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Eliciting Individual Discount Rates

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Author Info

  • Maribeth Coller

    ()

  • Melonie Williams

    ()

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    Abstract

    Controlled laboratory conditions using monetary incentives have been utilized in previous studies that examine individual discount rates, and researchers have found several apparently robust anomalies. We conjecture that subject behavior in these experiments may be affected by (uncontrolled) factors other than discount rates. We address some experimental design issues and report a new series of experiments designed to elicit individual discount rates. Our primary treatments include: (i) informing subjects of the annual and effective interest rates associated with alternative payment streams, and (ii) informing subjects of current market interest rates. We also test for the effect of real (vs. hypothetical) payments and for the effect of delaying both payment options (vs. offering an immediate payment option). The statistical analysis uses censored data techniques to account for the interactions between field and lab incentives. Each of the information treatments appears to reduce revealed discount rates. When both types of information are provided, annual rates in the interval of 15%–17.5% are revealed, whereas rates of 20%–25% are revealed in the control session. Each of the treatments also lowers the residual variance of subject responses. Copyright Kluwer Academic Publishers 1999

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    File URL: http://hdl.handle.net/10.1023/A:1009986005690
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    Bibliographic Info

    Article provided by Springer in its journal Experimental Economics.

    Volume (Year): 2 (1999)
    Issue (Month): 2 (December)
    Pages: 107-127

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    Handle: RePEc:kap:expeco:v:2:y:1999:i:2:p:107-127

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    Web page: http://www.springerlink.com/link.asp?id=102888

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    Keywords: experimental economics; discount rates; censored dependent variable;

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    1. Pender, John L., 1996. "Discount rates and credit markets: Theory and evidence from rural india," Journal of Development Economics, Elsevier, vol. 50(2), pages 257-296, August.
    2. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, vol. 35(3), pages 270-284, March.
    3. Loewenstein, George, 1987. "Anticipation and the Valuation of Delayed Consumption," Economic Journal, Royal Economic Society, vol. 97(387), pages 666-84, September.
    4. Loewenstein, George & Thaler, Richard H, 1989. "Intertemporal Choice," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 181-93, Fall.
    5. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
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