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Time Preferences over the Life Cycle and Household Saving Puzzles

Author

Listed:
  • Wataru Kureishi
  • Hannah Paule-Paludkiewicz
  • Hitoshi Tsujiyama
  • Midori Wakabayashi

Abstract

Most economic models assume that time preferences are stable over time, but the evidence on their long-term stability is lacking. We study whether and how time preferences change over the life cycle, exploiting representative long-term panel data. We provide new evidence that discount rates decrease with age and the decline is remarkably linear over the life cycle. Decreasing discounting helps a canonical life-cycle model to explain the household saving puzzles of undersaving when young and oversaving after retirement. Relative to the model with constant discounting, the model’s fit to consumption and asset data profiles improves by 40% and 30%, respectively.

Suggested Citation

  • Wataru Kureishi & Hannah Paule-Paludkiewicz & Hitoshi Tsujiyama & Midori Wakabayashi, 2021. "Time Preferences over the Life Cycle and Household Saving Puzzles," CESifo Working Paper Series 8935, CESifo.
  • Handle: RePEc:ces:ceswps:_8935
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp8935.pdf
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    References listed on IDEAS

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    3. Steffen Andersen & Glenn W. Harrison & Morten I. Lau & E. Elisabet Rutström, 2008. "Eliciting Risk and Time Preferences," Econometrica, Econometric Society, vol. 76(3), pages 583-618, May.
    4. Jonathan Cohen & Keith Marzilli Ericson & David Laibson & John Myles White, 2020. "Measuring Time Preferences," Journal of Economic Literature, American Economic Association, vol. 58(2), pages 299-347, June.
    5. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," American Economic Review, American Economic Association, vol. 104(7), pages 2075-2126, July.
    6. Manuel Arellano & Richard Blundell & Stéphane Bonhomme, 2017. "Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework," Econometrica, Econometric Society, vol. 85, pages 693-734, May.
    7. Stephan Meier & Charles D. Sprenger, 2015. "Temporal Stability of Time Preferences," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 273-286, May.
    8. Paola Giuliano & Antonio Spilimbergo, 2014. "Growing up in a Recession," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 787-817.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Time Preferences over the Life Cycle and Household Saving Puzzles
      by Christian Zimmermann in NEP-DGE blog on 2021-03-29 21:52:42

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    Cited by:

    1. Richard Foltyn & Jonna Olsson, 2021. "Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality," Working Papers 2021_13, Business School - Economics, University of Glasgow.

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    More about this item

    Keywords

    time preferences; preference stability; discount rates; household saving puzzles;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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