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

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  12. 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.
  13. Nava Ashraf & Dean Karlan & Wesley Yin, 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 635-672, May.
  14. Benhabib, Jess & Bisin, Alberto & Schotter, Andrew, 2010. "Present-bias, quasi-hyperbolic discounting, and fixed costs," Games and Economic Behavior, Elsevier, vol. 69(2), pages 205-223, July.
  15. Alessandro Tarozzi & Aprajit Mahajan, 2011. "Time Inconsistency, Expectations and Technology Adoption: The Case of Insecticide Treated Nets," Working Papers 11-14, Duke University, Department of Economics.
  16. Elisabet Rutstrom & Glenn Harrison & Morten Lau, 2005. "Dynamic consistency in denmark: A longitudinal field experiment," Artefactual Field Experiments 00060, The Field Experiments Website.
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