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Nonexponential Discounting: A Direct Test And Perhaps A New Puzzle

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  • Startz, Richard
  • Tsang, Kwok Ping

Abstract

Standard models of intertemporal utility maximization assume that agents discount future utility flows at a constant rate—exponential discounting. Euler equations estimated over different time horizons should have equal discount rates but they do not. Rising term yield premia imply discount rates that rise with longer horizons since uncertainty is much too small to account for the difference in interest rates. Such deviations from exponential discounting are large enough to make a significant difference in consumption choices over long horizons. Our results can be viewed as providing estimates of horizon-specific discounts, or as a further puzzle concerning intertemporal substitution and uncertainty.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number qt8pw4h6vk.

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Date of creation: 15 Jul 2012
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Handle: RePEc:cdl:ucsbec:qt8pw4h6vk

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Keywords: Social and Behavioral Sciences; intertemporal consumer choice; discounting; hyperbolic discounting; consumption; portfolio puzzles; CAPM;

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