Advanced Search
MyIDEAS: Login

Non-Exponential Discounting: A Direct Test

Contents:

Author Info

  • Richard Startz
  • Kwok Ping Tsang

Abstract

Standard models of intertemporal utility maximization under uncertainty assume that agents discount future utility flows at a constant compounded rate—exponential discounting. Euler equations estimated over different time horizons should have equal discount rates. They do not. Rising term yield premia on safe nominal bonds imply discount rates that rise with longer horizons, as uncertainty is much too small to account for the difference in interest rates. Five- year discount rates are roughly triple one-quarter discount rates. Such deviations from exponential discounting are large enough to make a large difference in consumption choices over long horizons. Our rejection of exponential discounting raises doubts about dynamic consistency in consumer choice, and therefore calls into question an underpinning of many intertemporal models.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: ftp://repec.econ.vt.edu/Papers/Tsang/Non-Exponential_Discounting.pdf
File Function: First version, 2007
Download Restriction: no

Bibliographic Info

Paper provided by Virginia Polytechnic Institute and State University, Department of Economics in its series Working Papers with number e07-16.

as in new window
Length: 34 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:vpi:wpaper:e07-16

Contact details of provider:
Postal: 3016 Pamplin Hall, Blacksburg, VA 24061-0316
Phone: 540-231-9636
Fax: 540-231-5097
Web page: http://www.econ.vt.edu
More information through EDIRC

Related research

Keywords: Intertemporal consumer choice; discounting; hyperbolic discounting; consumption;

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:vpi:wpaper:e07-16. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Djavad Salehi-Isfahani).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.