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A Flexible Test for Present Bias and Time Preferences Using Land-Lease Contracts

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  • Pieter A. Gautier
  • Aico Van Vuuren

Abstract

When agents have present bias, they discount more between now and the next period than between period t (> 1) and t + 1. How fast the future discount rate (evaluated today) decays is an empirical question. We show that the discount function can be non-parametrically identified with contracts that specify payments that take place at various points in time in the future and which are traded and priced in a competitive market. We use a unique land lease-contract data set for Amsterdam, which has the above properties, to test for present bias in a flexible way. We find no evidence for present bias in this market. Even though we allow for a general-hyperbolic specification (which has exponential discounting as a special case), our estimates converge to an exponential discount function with a corresponding discount rate (in our baseline specification) of 8 %.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3549.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3549

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Keywords: present bias; hyperbolic discounting; discount rate; hedonic estimation;

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  1. Hanming Fang & Dan Silverman, 2004. "Time-inconsistency and Welfare Program Participation: Evidence from the NLSY," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1465, Cowles Foundation for Research in Economics, Yale University.
  2. Jeremy Tobacman & David Laibson, 2007. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Economics Series Working Papers, University of Oxford, Department of Economics 341, University of Oxford, Department of Economics.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
  4. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 40(2), pages 351-401, June.
  5. Paserman, Marco Daniele, 2004. "Job Search and Hyperbolic Discounting: Structural Estimation and Policy Evaluation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4396, C.E.P.R. Discussion Papers.
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  7. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, Elsevier, vol. 8(3), pages 201-207.
  8. Ahumada, Hildegart A. & Garegnani, Maria Lorena, 2007. "Testing hyperbolic discounting in consumer decisions: Evidence for Argentina," Economics Letters, Elsevier, Elsevier, vol. 95(1), pages 146-150, April.
  9. Hanming Fang & Yang Wang, 2010. "Estimating Dynamic Discrete Choice Models with Hyperbolic Discounting, with an Application to Mammography Decisions," NBER Working Papers 16438, National Bureau of Economic Research, Inc.
  10. Piet M.A. Eichholtz, 1997. "A Long Run House Price Index: The "Herengracht Index", 1628-1973," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 25(2), pages 175-192.
  11. Ariel Rubinstein, 2003. ""Economics and Psychology"? The Case of Hyperbolic Discounting," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1207-1216, November.
  12. Uri Benzion & Amnon Rapoport & Joseph Yagil, 1989. "Discount Rates Inferred from Decisions: An Experimental Study," Management Science, INFORMS, INFORMS, vol. 35(3), pages 270-284, March.
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