Non-Exponential Discounting: A Direct Test And Perhaps A New Puzzle

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Standard models of intertemporal utility maximization assume that agents discount future utility flows at a constant rate — exponential discounting. Euler equations estimated over different time horizons should have equal discount rates. They do not. Rising term yield premia imply discount rates that rise with longer horizons, as uncertainty is much too small to account for the difference in interest rates. Such deviations from exponential discounting are large enough to make a large difference in consumption choices over long horizons. Our results can be viewed as providing estimates of horizon-specific discounts, or as a further puzzle concerning intertemporal substitution and uncertainty.