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Avoiding the Curves: Direct Elicitation of Time Preferences

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  • Susan K. Laury
  • Melayne Morgan McInnes
  • J. Todd Swarthout
  • Erica Von Nessen

Abstract

We propose and test a new method for eliciting curvature-controlled discount rates that are invariant to the form of the utility function. The advantage of this method is that individual discount rates can be obtained without knowledge of risk attitude or parametric assumptions about the form of the utility function. We compare our single elicitation method that does not require estimation of the utility function to the Andersen et al. (2008) double elicitation technique in which the utility function and discount rates are jointly estimated. We use a laboratory experiment to perform a within-subjects comparison of discount rates from these two methods and find consistent results, which is reassuring given the wide range of estimates in the literature. In addition, the estimated discount rates in our study are "plausibly low" in contrast to the vast majority of other discount rate studies. Average discount rates are estimated to be between 12.2 and 14.1 percent. Our results are robust to relaxing the expected utility assumption of linearity in the probabilities, as we find little evidence of probability weighting in our data.

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File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2011-01.pdf
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File URL: http://excen.gsu.edu/workingpapers/GSU_EXCEN_WP_2012-05.pdf
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Bibliographic Info

Paper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2011-01.

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Length: 36
Date of creation: Jan 2011
Date of revision: Mar 2012
Handle: RePEc:exc:wpaper:2011-01

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  1. Charles M. Harvey, 1986. "Value Functions for Infinite-Period Planning," Management Science, INFORMS, vol. 32(9), pages 1123-1139, September.
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  3. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, 05.
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Cited by:
  1. Blake, David & Wright, Douglas & Zhang, Yumeng, 2011. "Age dependent investing: Optimal funding and investment strategies in defined contribution pension plans when members are rational life cycle financial planners," MPRA Paper 34277, University Library of Munich, Germany.
  2. Holden, Stein, 2014. "Explaining anomalies in intertemporal choice: A mental zooming theory," CLTS Working Papers 2/14, Centre for Land Tenure Studies, Norwegian University of Life Sciences.
  3. Cheung, Stephen L., 2013. "On the Elicitation of Time Preference under Conditions of Risk," Working Papers 2013-15, University of Sydney, School of Economics.
  4. Holden, Stein, 2013. "High discount rates: - An artifact caused by poorly framed experiments or a result of people being poor and vulnerable?," CLTS Working Papers 8/13, Centre for Land Tenure Studies, Norwegian University of Life Sciences.
  5. Ubfal, Diego, 2012. "How General Are Time Preferences? Eliciting Good-Specific Discount Rates," IZA Discussion Papers 6774, Institute for the Study of Labor (IZA).
  6. Mohammed Abdellaoui & Han Bleichrodt & Olivier l’Haridon, 2013. "Sign-dependence in intertemporal choice," Journal of Risk and Uncertainty, Springer, vol. 47(3), pages 225-253, December.
  7. Howard, Gregory, 2013. "Discounting for personal and social payments: Patience for others, impatience for ourselves," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 583-597.

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