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Reference Dependence in Intertemporal Preference

Zhihua Li () and Songfa Zhong
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Zhihua Li: University of Birmingham
Songfa Zhong: National University of Singapore

Discussion Papers from Department of Economics, University of Birmingham

Abstract: This paper examines the role of reference dependence in the elicitation of time preference. The dynamic feature of intertemporal choices offers multiple channels through which the reference effect can occur. Naturally, in evaluating future consumption, one’s current consumption serves as a reference point, and this type of reference point is endogenously determined. Yet potentially exogenous factors are present in the choice environment that also influence the decision maker’s revealed preferences. We performed an experiment that allowed us to examine both the endogenous and exogenous reference effects on the revealed tine preferences. Our design also enabled us to separately estimate the discount factor jointly with the utility curvature. The observed behavioral patterns show that the estimated discount factors were biased by reference endogenous and exogenous points. We also propose a mixture model to account for the reference-dependent effects. We demonstrate that after removing the reference effects and also accounting for the preferences toward money via the utility curvature, the elicited discount factor becomes more patient. We further discuss the implications of the reference-dependent effect on recent observations of elicited intertemporal preferences, including underestimation of the discount factor and the issue of subadditivity.

Keywords: time preference; reference dependence; prospect theory; experiment (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-02
New Economics Papers: this item is included in nep-dcm, nep-sea and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bir:birmec:20-01

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