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Eliciting Discount Functions when Baseline Consumption changes over Time

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  • Anke Gerber

    (Hamburg University)

  • Kirsten I.M. Rohde

    (Erasmus University Rotterdam)

Abstract

Many empirical studies on intertemporal choice report preference reversals in the sensethat a preference between a small reward to be received soon and a larger reward to bereceived later reverses as both rewards are equally delayed. Such preference reversals arecommonly interpreted as contradicting constant discounting. This interpretation is correctonly if baseline consumption to which the outcomes are added, remains constant over time.The difficulty with measuring discounting when baseline consumption changes over time,is that delaying an outcome has two effects: (1) due to the change in baseline consumption,it changes the extra utility from receiving the outcome, and (2) it changes the factor bywhich this extra utility is discounted. In this paper we propose a way to disentangle thetwo effects, which allows us to draw conclusions about discounting even when baselineconsumption changes over time.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-103/1.

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Date of creation: 19 Nov 2009
Date of revision: 24 Feb 2010
Handle: RePEc:dgr:uvatin:20090103

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Web page: http://www.tinbergen.nl

Related research

Keywords: Hyperbolic discounting; Constant discounting; Preference reversals; Decreasing impatience;

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  1. Bleichrodt, Han & Rohde, Kirsten I.M. & Wakker, Peter P., 2009. "Non-hyperbolic time inconsistency," Games and Economic Behavior, Elsevier, vol. 66(1), pages 27-38, May.
  2. Jinkwon Lee, 2008. "The effect of the background risk in a simple chance improving decision model," Journal of Risk and Uncertainty, Springer, Springer, vol. 36(1), pages 19-41, February.
  3. Jawwad Noor, 2007. "Hyperbolic Discounting and the Standard Model," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2007-028, Boston University - Department of Economics.
  4. Donkers, A.C.D. & Melenberg, B. & Soest, A.H.O. van, 1999. "Estimating Risk Attitudes Using Lotteries; A Large Sample Approach," Discussion Paper, Tilburg University, Center for Economic Research 1999-12, Tilburg University, Center for Economic Research.
  5. Manel Baucells & Franz H. Heukamp, 2012. "Probability and Time Trade-Off," Management Science, INFORMS, INFORMS, vol. 58(4), pages 831-842, April.
  6. Gerber, Anke & Rohde, Kirsten I.M., 2010. "Risk and preference reversals in intertemporal choice," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 654-668, December.
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