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Compensated Discount Functions: An Experiment on the Influence of Expected Income on Time Preferences

Author

Listed:
  • Attila Ambrus
  • Tinna Laufey Ásgeirsdóttir
  • Jawwad Noor
  • László Sándor

Abstract

This paper examines the empirical question of whether subjects? static choices among rewards received at different times are influenced by their expected income levels at those times. Moreover, we recover time preferences after compensating for possible income effects. Besides eliciting subjects? preference between standard delayed rewards, the experimental design also elicited their preferences over delayed rewards that are received only if the subject?s income remains approximately constant. These preferences, along with elicited subjective probabilities of satisfying the condition, make the correction possible. We conducted the experiments in Iceland, where our prompt access to income tax records enabled us to condition delayed rewards on income realizations. We find that background income is associated with preferences over unconditional delayed rewards. While most people exhibited present bias when comparing unconditional delayed rewards, subjects with stable income did not. The results are similar for the entire sample once we correct subjects? discount functions for income effects. This suggests that income expectations have an effect on choices between future rewards, and that this may account for some of the present-bias observed in experiments.

Suggested Citation

  • Attila Ambrus & Tinna Laufey Ásgeirsdóttir & Jawwad Noor & László Sándor, 2014. "Compensated Discount Functions: An Experiment on the Influence of Expected Income on Time Preferences," Working Paper 197736, Harvard University OpenScholar.
    • Handle: RePEc:qsh:wpaper:197736
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    File URL: http://scholar.harvard.edu/sandor/node/197736
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    Cited by:

    1. Mark Dean & Anja Sautmann, 2021. "Credit Constraints and the Measurement of Time Preferences," The Review of Economics and Statistics, MIT Press, vol. 103(1), pages 119-135, March.
    2. Anke Gerber & Kirsten I. M. Rohde, 2018. "Weighted temporal utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(1), pages 187-212, July.
    3. Uttara Balakrishnan & Johannes Haushofer & Pamela Jakiela, 2020. "How soon is now? Evidence of present bias from convex time budget experiments," Experimental Economics, Springer;Economic Science Association, vol. 23(2), pages 294-321, June.
    4. Sebastian Schweighofer-Kodritsch, 2015. "Time Preferences and Bargaining," STICERD - Theoretical Economics Paper Series /2015/568, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    5. Leandro S. Carvalho & Stephan Meier & Stephanie W. Wang, 2016. "Poverty and Economic Decision-Making: Evidence from Changes in Financial Resources at Payday," American Economic Review, American Economic Association, vol. 106(2), pages 260-284, February.

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