The decade after tomorrow: Estimation of discount rates from realistic temporal decisions over long time horizons

Abstract

Understanding trade-offs across time is important in many areas of economics, but eliciting and estimating the parameters of discounting processes is difficult. We implement a novel stated choice approach to measuring discount rates that combines desirable elements of laboratory experiments and market behavior studies. We use a decadal time frame and exogenous variation in payment attributes to identify private consumption discount rate parameters that are consistent with the observed choice patterns. Imposing exponential discounting implies that people discount the future in a manner consistent with market interest rates, but we find substantial heterogeneity that varies with observable respondent characteristics. Relaxing the time consistent discounting assumption provides empirical evidence against declining discount rates.