Discounting behavior: A reconsideration

Steffen Andersen, Glenn Harrison, Morten Lau and E. Elisabet Rutström

European Economic Review, 2014, vol. 71, issue C, 15-33

Abstract: 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 th`e 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 surprising conclusions. Assuming an exponential discounting model we estimate discount rates to be 9% on average. We 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.

Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (117)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292114000968
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Discounting Behavior: A Reconsideration (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:71:y:2014:i:c:p:15-33

DOI: 10.1016/j.euroecorev.2014.06.009

Access Statistics for this article

European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer

More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().