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Learning Temporal Preferences

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Abstract

We analyse households’ responses to an unanticipated change in consumption opportunities and evaluate their implications for the nature and formation of preferences. We study the tariff experiment conducted by South Central Bell where local telephone measured tariffs were introduced for the first time in Louisville, KY. Households were given the choice to remain in a flat rate scheme or switch to the new measured tariff scheme. The results of the analysis support models where consumers react to a change in the environment in the direction predicted by theories of rational investment in information. Households learn rapidly to undertake optimal decisions, and react to potential savings of seemingly small magnitude, typically about $5.00 per month. We find no support for models where consumers’ responses are determined by inertia or impulsiveness, including systematic tendencies to undervalue future wants common to models of hyperbolic discounting. From a methodological viewpoint, the analysis shows how the appropriate treatment of predetermined endogenous variables and state dependence turns out to be crucial for interpreting the data.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2002-22.

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Date of creation: 2002
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Handle: RePEc:bro:econwp:2002-22

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Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Becker, Gary S & Mulligan, Casey B, 1997. "The Endogenous Determination of Time Preference," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 729-58, August.
  2. Christopher Harris & David Laibson, 2001. "Instantaneous Gratification," NajEcon Working Paper Reviews 625018000000000267, www.najecon.org.
  3. Miravete, Eugenio J, 2000. "Choosing the Wrong Calling Plan? Ignorance, Learning, and Risk Aversion," CEPR Discussion Papers 2562, C.E.P.R. Discussion Papers.
  4. Miravete, Eugenio J, 2002. "Estimating Demand for Local Telephone Service with Asymmetric Information and Optional Calling Plans," Review of Economic Studies, Wiley Blackwell, vol. 69(4), pages 943-71, October.
  5. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  6. Becker, G.S. & Mulligan, C.B., 1994. "On the Endogenous Determination of Time Preference," University of Chicago - Economics Research Center 94-2, Chicago - Economics Research Center.
  7. Bo E. Honoré & Ekaterini Kyriazidou, 2000. "Panel Data Discrete Choice Models with Lagged Dependent Variables," Econometrica, Econometric Society, vol. 68(4), pages 839-874, July.
  8. Arellano, Manuel & Carrasco, Raquel, 2003. "Binary choice panel data models with predetermined variables," Journal of Econometrics, Elsevier, vol. 115(1), pages 125-157, July.
  9. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
  10. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  11. Eugenio J. Miravete, 2003. "Choosing the Wrong Calling Plan? Ignorance and Learning," American Economic Review, American Economic Association, vol. 93(1), pages 297-310, March.
  12. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
  13. Simon, Herbert A, 1986. "Rationality in Psychology and Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages S209-24, October.
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