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Separation of Intertemporal Substitution and Time Preference Rate From Risk Aversion: Experimental Analysis With Reward Designs

In: Developments on Experimental Economics

Author

Listed:
  • Ryoko Wada

    (Keiai University)

  • Sobei H. Oda

    (Kyoto Sangyo University)

Abstract

In the standard intertemporal specification of expected utility (1) $$ U_t = (1 - \beta )E\left[ {\sum\limits_{t = 0}^\infty {\frac{{c_t^{1 - \sigma } }} {{1 - \sigma }}} \beta ^t } \right],$$ the coefficient of relative risk aversion σ is the reciprocal of the rate of intertemporal substitution 1/σ. This has been suspected as a source of poor performance of the standard stochastic consumption model and the risk-premium puzzle in asset pricing 1. More generally, the problematic feature of expected utility applied to intertemporal settings is that its treatment of ‘gambling over time’ cannot distinguish risk aversion and intertemporal substitution 2.

Suggested Citation

  • Ryoko Wada & Sobei H. Oda, 2007. "Separation of Intertemporal Substitution and Time Preference Rate From Risk Aversion: Experimental Analysis With Reward Designs," Lecture Notes in Economics and Mathematical Systems, in: Sobei Hidenori Oda (ed.), Developments on Experimental Economics, pages 131-136, Springer.
    • Handle: RePEc:spr:lnechp:978-3-540-68660-6_9
    DOI: 10.1007/978-3-540-68660-6_9
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