Credit Constraints and the Measurement of Time Preferences

Abstract

Incentivized experiments are commonly used to estimate marginal rates of intertemporal substitution (MRS) in the lab and in the field in order to make inferences about individual time preferences. This paper considers an integrated model of behavior in which individuals are subject to financial shocks and credit constraints, and take those into account when making experimental choices. The model shows that measured MRS depends on the individual’s effective interest rate which is equal to the relative marginal utility of current and future consumption. Experimental responses should therefore be correlated with other variables that describe the subject’s financial situation, like savings and shocks to income and consumption. We test the model using a new a panel data set from Mali and find evidence for such effects. Our results imply that the relationship between experimentally elicited MRS and time preferences is not straightforward. However, measured MRS can be useful in determining the importance of different types of financial shocks to the household.