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Credit Constraints and the Measurement of Time Preferences

Incentivized experiments are commonly used to estimate marginal rate of intertemporal substitution (MRS) in the lab and in the ?eld, and to make inferences about subject’s time preference. This paper considers the implications of an integrated model of behavior in which individuals are subject to ?nancial shocks and credit constraints and take those into account when making experimental choices. The model shows that measured MRS depends on the individual’s e?ective interest rate and her marginal utility of current and future consumption. Experimental responses should therefore be correlated with other variables that describe the subject’s ?nancial situation, like savings, income and consumption shocks. We test the model with a panel data set from Mali and ?nd evidence for such e?ects. We discuss how our model can be combined with repeated time preference measures to identify time preferences and other household characteristics - including credit constraints and the importance of di?erent types of ?nancial shocks.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2014-1.

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Date of creation: 2014
Date of revision:
Handle: RePEc:bro:econwp:2014-1
Contact details of provider: Postal: Department of Economics, Brown University, Providence, RI 02912

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