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Intertemporal choice and the magnitude effect

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  • Noor, Jawwad

Abstract

A robust finding in experiments on time preference is the magnitude effect: subjects tend to be more patient towards larger rewards. Using a calibration theorem, we argue against standard curvature-based explanations for the finding. We axiomatize a model of preferences over dated rewards that generalizes the standard exponential discounting model by permitting the discount factor to depend on the reward being discounted. The model is shown to behaviorally subsume the hyperbolic discounting model as a special case. When embedded in a sequential bargaining game the model gives rise to multiple stationary subgame perfect equilibria. There may exist equilibria in which the first mover gets a smaller share despite also being the more patient player.

Suggested Citation

  • Noor, Jawwad, 2011. "Intertemporal choice and the magnitude effect," Games and Economic Behavior, Elsevier, vol. 72(1), pages 255-270, May.
  • Handle: RePEc:eee:gamebe:v:72:y:2011:i:1:p:255-270
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    1. Manel Baucells & Franz H. Heukamp, 2012. "Probability and Time Trade-Off," Management Science, INFORMS, vol. 58(4), pages 831-842, April.
    2. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    3. Fishburn, Peter C & Rubinstein, Ariel, 1982. "Time Preference," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(3), pages 677-694, October.
    4. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    5. George Loewenstein & Drazen Prelec, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 573-597.
    6. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
    7. Ok, Efe A. & Masatlioglu, Yusufcan, 2007. "A theory of (relative) discounting," Journal of Economic Theory, Elsevier, vol. 137(1), pages 214-245, November.
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    Cited by:

    1. Matthias Sutter & Martin G. Kocher & Daniela Glätzle-Rützler & Stefan T. Trautmann, 2013. "Impatience and Uncertainty: Experimental Decisions Predict Adolescents' Field Behavior," American Economic Review, American Economic Association, vol. 103(1), pages 510-531, February.
    2. Jinrui Pan & Craig Webb & Horst Zank, 2013. "Discounting the Subjective Present and Future," The School of Economics Discussion Paper Series 1305, Economics, The University of Manchester.
    3. Dziewulski, Pawel, 2014. "Revealed time-preference," MPRA Paper 56596, University Library of Munich, Germany.
    4. Manel Baucells & Franz H. Heukamp, 2012. "Probability and Time Trade-Off," Management Science, INFORMS, vol. 58(4), pages 831-842, April.
    5. Pan, Jinrui & Webb, Craig S. & Zank, Horst, 2015. "An extension of quasi-hyperbolic discounting to continuous time," Games and Economic Behavior, Elsevier, vol. 89(C), pages 43-55.
    6. Sebastian Schweighofer-Kodritsch, 2015. "Time Preferences and Bargaining," STICERD - Theoretical Economics Paper Series /2015/568, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    7. Orlando Gomes & Alexandra Ferreira-Lopes & Tiago Sequeira, 2014. "Exponential discounting bias," Journal of Economics, Springer, vol. 113(1), pages 31-57, September.

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