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Abstract
Intertemporal choices are affected by both discount rate and utility curvature. We investigate how the two aspects of time preference are affected by the size of the total budget using an intertemporal allocation task. At the aggregate level as well as at the individual level, we find magnitude effects both on the discount rate and on intertemporal substitutability (i.e., utility curvature). Individuals are more patient when dealing with larger budgets and also regard larger budgets to be more fungible. The latter effect suggests that the degree of asset integration is increasing in the stake.
Highlights
The prediction of the standard consumption-savings model, that people always discount an income at the market interest rate, has been found inconsistent with empirical results.1 One important anomaly, dating back to Thaler (1981), is the magnitude1 3 Vol.:(0123456789)C
Both channels have considerable impacts on predicted choices. We find that the latter effect is not the same as the magnitude effect on risk attitudes found in previous studies, and it might be problematic to correct for the curvature of utility functions by risk attitudes
This shows that the two channels of the magnitude effect on intertemporal choices are robust against individual heterogeneity
Summary
The prediction of the standard consumption-savings model, that people always discount an income at the market interest rate, has been found inconsistent with empirical results. One important anomaly, dating back to Thaler (1981), is the magnitude. Holden and Quiggin (2017) assume that people take into account more background consumption when experimental rewards are larger, which explains the magnitude effect in single-reward tasks When those theories (with proper extension) are applied to intertemporal allocation tasks, Benhabib et al (2010) and Noor (2011) predict a magnitude effect on the discount rate, while Fudenberg and Levine (2006) and Holden and Quiggin (2017) predict a magnitude effect on the utility curvature. At the aggregate level as well as at the individual level, we find magnitude effects both on the discount rate and on intertemporal substitutability Both channels have considerable impacts on predicted choices.
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