ORDER-DEPENDENT PRESENT VALUE: THEORY AND AN EXPERIMENTAL TEST

Gary Gigliotti (), Barry Sopher and Roger Klein ()
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Gary Gigliotti: Rutgers University

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: We propose and analyze a generalization of present value maximization, "order dependent present value (ODPV)," for intertemporal income choice. The model is analagous to the rank dependent expected utility model (RDEU) for choice under risk. The main feature of interest in the model is the "payment transformation function," which operates on proportions of a fixed total of payments just as the probability weighting function in RDEU operates on probabilities. The ODPV model can accomodate many choice patterns for intertemporal choice, so we conduct experiments in an attempt to (i) measure the structure of preferences over intertemporal income streams and (ii) test for stability of the payment transformation function over different choice sets. The design is based on manipulations of the "intertemporal choice triangle." A disaggregated nonparametric analysis in which we classify subjects according to which transformation function is most consistent with their revealed choice behavior shows that a linear and a strictly concave transformation function are the most common. Direct estimation of the transformation function shows clear support for a strictly concave transformation function. We also test between the ODPV model and the Discounted Utility (DU) model, and clearly reject DU in favor of ODPV.

Keywords: present value maximization; Intertemporal choice; order-dependent present value (search for similar items in EconPapers)
JEL-codes: C91 (search for similar items in EconPapers)
Date: 1998-10-21
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:199830

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