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

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  • Gautier, Pieter

    ()
    (VU University Amsterdam)

  • van Vuuren, Aico

    ()
    (VU University Amsterdam)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5821.

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Length: 38 pages
Date of creation: Jun 2011
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Handle: RePEc:iza:izadps:dp5821

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

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  1. 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.
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  9. 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.
  10. Partha Dasgupta & Eric Maskin, 2004. "Uncertainty and Hyperbolic Discounting," Economics Working Papers, Institute for Advanced Study, School of Social Science 0023, Institute for Advanced Study, School of Social Science.
  11. 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.
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