An experimental investigation of time discounting in strategic settings

Abstract

Several studies have shown that people greatly discount future benefits and costs, but few have examined how discounting is manifested in strategic settings. This paper investigates the degree to which the timing of payments affects behavior in four commonly studied strategic settings: a Prisoners’ Dilemma, a Stag-Hunt Game, a First Price Auction, and a Second Price Auction. In general, a two week delay in the date of payment has a comparable effect on outcomes as a substantial reduction in current payoffs. A follow-up study compares individual’s own discount rates with their beliefs of others’ discount rates and finds that people generally think they are more patient than others. This belief can drive behavior in strategic settings: we find clear evidence for this in the Stag-Hunt Game.