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Discounting Behavior: A Reconsideration

  • Steffen Andersen


    (Copenhagen Business School)

  • Glenn W. Harrison


    (Robinson College of Business, Georgia State University)

  • Morten Lau


    (Durham Business School)

  • Elisabet E. Rutstroem


    (Robinson College of Business, Georgia State University)

We re-evaluate the theory, experimental design and econometrics behind claims that individuals exhibit non-constant discounting behavior. Theory points to the importance of controlling for the non-linearity of the utility function of individuals, since the discount rate is defined over time-dated utility flows and not flows of money. It also points to a menagerie of functional forms to characterize different types of non-constant discounting behavior. The implied experimental design calls for individuals to undertake several tasks to allow us to identify these models, and to several treatments such as multiple horizons and the effect of allowing for a front end delay on earlier payments. The implied econometrics calls for structural estimation of the theoretical models, allowing for joint estimation of utility functions and discounting functions. Using data collected from a representative sample of 413 adult Danes in 2009, we draw striking conclusions. Assuming an exponential discounting model we estimate discount rates to be 5.6% on average: this is significantly lower than all previous estimates using controlled experiments. We also find no evidence to support quasi-hyperbolic discounting or “fixed cost†discounting, and only modest evidence to support other specifications of non-constant discounting. Furthermore, the evidence for non-constant discounting, while statistically significant, is not economically significant in terms of the size of the estimated discount rates. We undertake extensive robustness checks on these findings, including a detailed review of the previous, comparable literature.

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Paper provided by Durham University Business School in its series Working Papers with number 2011_01.

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Date of creation: 01 Jan 2011
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Handle: RePEc:dur:durham:2011_01
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