Rate Of Time Preference Research Articles

Capital depreciation allowances, redistributive taxation, and economic growth

AbstractAre capital depreciation allowances when coupled with capital income taxes good instruments for redistribution in the long run? In a simple two‐agent‐economy I find that accelerated depreciation is good for growth, but bad for redistribution. The opposite holds for capital income taxes. However, in a feedback Stackelberg equilibrium, where the government is the leader and the private sector the follower, the depreciation allowance is maximal in the long run, time‐consistent optimum. This removes the accumulation distortion of capital income taxes. Furthermore, the latter, and so redistribution, is found to be generically nonzero in the time‐consistent optimum, and depends on the social weight of transfers receivers, the pretax factor income distribution, the intertemporal elasticity of substitution and the time preference rate. Thus, accelerated depreciation allowances are an important indirect tool for redistribution. The tax scheme allows for a separation of “efficiency” and “equity” concerns for redistributive policies.

The only ethical argument for positive δ? Partiality and pure time preference

I consider the plausibility of discounting for kinship, the view that a positive rate of pure intergenerational time preference is justifiable in terms of agent-relative moral reasons relating to partiality between generations. I respond to Parfit's objections to discounting for kinship, but then highlight a number of apparent limitations of this approach. I show that these limitations largely fall away when we reflect on social discounting in the context of decisions that concern the global community as a whole, such as those related to global climate change.

Reclamation of a resource extraction site: A differential game approach

AbstractWe study an extraction site reclamation problem in a two‐player differential game setting over a finite time horizon. Environmental regulation requires each firm to engage in reclamation efforts during the entire lifespan of the extraction site and to pay an abandonment reclamation fee at the end of its lease term for the unclaimed pollution caused by firms’ activities. Firms determine their reclamation efforts in order to minimize their reclamation cost. We analyze and compare individual firms’ choices and the pollution stock in the noncooperative and the cooperative cases by distinguishing between situations in which firms are homogeneous and heterogeneous. We study the case in which firms have different lease durations and different degrees of environmental liability. We show that the dynamics of the reclamation efforts may be substantially different under noncooperation and cooperation, and in both cases, it is mainly determined by how the rate of time preference and the growth rate of firms’ liabilities compare. Moreover, in all scenarios, the reclamation efforts generally rise with the degree of liability and fall with the lease duration, suggesting that in order to promote better environmental outcomes, the regulators should carefully determine the lease conditions by introducing intra‐term reclamation fees along with stringent environmental accountability.

A Novel Model of Emergency Demand Response Program for Optimal Aggregators’ Strategy

Demand response (DR) programs have been used for a variety of purposes. In this study, Emergency Demand Response Program (EDRP), as an incentive-based program, is used for peak clipping, managing the volatility and the increase of the electricity prices, monetizing consumers’ involuntary electricity outage and controlling the price in the day-ahead market. A market-driven model in the form of a combination of Diamond’s over-lapping generations (OLG) and Price Elasticity (PE) formulations is proposed for the aggregates (AGGs) by which they can manage their consumers’ demand at the peak hours and maximize the profit. Furthermore, maximizing the profit of the AGGs was performed by determining the optimal amount of demand while three technical constraints such as demand ceiling, relative risk aversion and incentive limits were also included in the proposed model. The profit function of the AGGs is considered in the form of the difference between the revenue and the cost. The problem is solved with taking into consideration the different rate of time preference and PE over a 24-hour period. The simulation results showed a successful performance of the proposed model from the considered economical and technical viewpoints.

The Cross-Section of Household Preferences

This paper estimates the cross-sectional distribution of Epstein-Zin preference parameters in a large administrative panel of Swedish households. We consider life-cycle model of saving and portfolio choice that incorporates risky labor income, safe and risky financial assets inside and outside retirement accounts, and real estate. We study middle-aged stock-owning households grouped by education, industry of employment, and birth cohort as well as by their accumulated wealth and risky portfolio shares. We find some heterogeneity in risk aversion (a standard deviation of 0.47 around a mean of 5.24 and median of 5.30) and considerable heterogeneity in the time preference rate (standard deviation 6.0% around a mean of 6.2% and median of 4.1%) and elasticity of intertemporal substitution (standard deviation 0.96 around a mean of 0.99 and median of 0.42). Risk aversion and the EIS are almost cross-sectionally uncorrelated, in contrast with the strong negative correlation that we would find if households had power utility with heterogeneous risk aversion. The TPR is weakly negatively correlated with both the other parameters. We estimate lower risk aversion for households with riskier labor income and higher levels of education, and a higher TPR and lower EIS for households who enter our sample with low initial wealth.

Accounting for Social Security Claiming Behavior

Why do most individuals claim Social Security benefits before the full retirement age? Claiming benefits early results in a substantial reduction in pension income, yet many people claim as early as possible (age 62) or soon thereafter. We argue that by answering this question, we can make two additional contributions to the literature. First, early claiming is equivalent to low demand for Social Security annuity, thus it offers a unique context for studying the well-known annuity puzzle. Since participation in Social Security is nearly universal, the low demand for this annuity cannot be explained away by market failures. Second, we show that claiming decisions are closely linked to the subjective rate of time preferences and thus can provide a new angle for the identification of this parameter. We provide a quantitative analysis of claiming decisions using a rich structural life-cycle model that matches many important features of the data. We find that the claiming puzzle can be attributed to a combination of three factors: (i) the discrepancy between individuals' subjective valuation of Social Security annuity and its implicit price, (ii) strong bequest motives, (iii) pre-annuitized wealth. We show that if individuals were rewarded for delaying claiming not with additional annuity income but with equivalent (in present value terms) lump-sum payments, the fraction of early claimers would be significantly reduced.

How Uzawa differs from Lucas

Abstract The Uzawa–Lucas model is a benchmark model in endogenous growth theory. But Lucas is so influential that the Uzawa–Lucas model is virtually the Lucas model. This article distinguishes between the Uzawa model and the Lucas model, and examines the Uzawa model in detail for the first time. It is certainly true that the two models have much in common. However, there are also important differences. Economically, in the Uzawa model, people choose between working in the production sector and working in the education sector, whereas in the Lucas model people choose between working in the production sector and not working in order to go to school. Mathematically, the potentially maximum growth rate must be smaller than the rate of time preference (less population growth) in the former, whereas the opposite must hold in the latter. This means that the two models are not applicable to the same economy.

Instability, political regimes and economic growth. A theoretical framework

AbstractThis paper models the influence of political instability on long‐term economic growth. We consider three political systems associated to real‐world political systems of increasing participation in policy‐making. For each system, society chooses an agent that remains in power unless instability, represented as a shortening of the period in office, sets in, which in turn leads to a shortening of the temporal horizon. The agent in charge reevaluates the optimal consumption program, by increasing the rate of time preference and the consumption. With a positively skewed income distribution, the relationship between participation and growth presents different shapes, depending on the probability of the agent in office being ousted. Our results lend theoretical support to the various findings in the empirical literature on the effects of political systems on economic growth.

Social discounting, inequality aversion, and the environment

Measures of inequality aversion are elicited using hypothetical decision tasks. The tasks require an assessment of projects in the presence of environmental inequalities across space and time. We also test the effect of different environmental domains (air pollution, recreational forest and soil fertility) and contextual framings (gain/loss, within/between regions and present–future/past–present inter-temporal trade-offs). Estimated mean inequality aversion is higher in the intra-temporal framing (an elasticity of 2.9), than in the inter-temporal framing with either negative (2.0) or positive (1.4) growth in environmental quality. Differences across environmental domains exist but are less pronounced. Similar results hold for pure time preference. Losses are associated with a lower pure rate of time preference but higher inequality aversion compared to gains. The results indicate how domain-specific ‘dual’ discount rates or rather changing relative shadow prices for the environment might be calibrated. Yet, seen as an exercise in empirical social choice, the context dependent results reject the classical Utilitarian formulation of a single Ramsey Rule.

Discounting and Global Environmental Change

Discounting plays a central role in decisions about global environmental change that affect the well-being of future generations. Discounting the future more heavily tilts decisions toward the present, making it less likely that society will undertake actions to mitigate climate change or other global environmental change. This article reviews the standard economics approach to discounting that emerges from solving for optimal savings and investment through time. Discounting depends on the pure rate of time preference and differences in consumption levels across time, giving rise to different marginal utilities of consumption. Discounting for problems like climate change that impact future generations involves an ethical dimension. This article includes discussions of ethical dimensions of discounting related to intragenerational and intergenerational equity and also covers behavioral economics, ecological economics, and mainstream economics approaches to discounting. The article closes with a review of the debates over discounting in climate change policy.

Sustainability of pension schemes

We build a “smooth” automatic balancing mecanism (S-ABM) which would result from an optimal tradeoff between increasing the receipts and reducing the expenditures of a pension scheme. The S-ABM obtains from minimizing a sum of discounted quadratic loss function under the constraint of an intertemporal budget balance. One advantage of this model of “optimal” adjustment is its ability to analyse various configurations in terms of ABMs by controlling the adjustment pace. Notably, this S-ABM permits to specify two particular cases we respectively denote “flat Swedish-type ABM” and “fiscal-cliff US-type ABM”. They are obtained by assuming very high adjustment costs on revenue (implying only pension benefit adjustment) and by choosing specific sequences of social time preference rate. We apply this ABM to the case of the United States Social Security to evaluate the potential adjustments necessary to ensure financial sustainability. These assessments are made under various assumptions about forecast time horizon, social time preference and weighting of social costs associated with increased receipts and/or lower expenditures.

Austrian business cycle theory: are 100 percent reserves sufficient to prevent a business cycle?

Economists in the tradition of the Austrian school have shown that one type of maturity mismatching can cause maladjustments and business cycles.1 When banks expand credit, by granting loans and creating demand deposits, they generate immediately withdrawable liabilities to finance longer-term loans. The newly created demand deposits do not represent a reduction of consumption, i.e., that characterized by real savings. As a con sequence, in terest rates are artificially reduced under the level they would have been in a free market reflecting real savings and time preference rates.2 Thus, entrepreneurs are prone to engage in more and longer projects than could be financed with the available supply of real savings. Before all projects that are financed by the credit expansion are finished, a bust occurs. An absence of realsavings to sustain the factors of production in the production pro cesses and to produce complementary and necessary capital goods becomes evident. As a result, malinvestments are liquidated and the structure of production is brought in line with consumer preferences again. This is the Austrian Business Cycle Theory (ABCT) in a nutshell.
 As a remedy Austrian economists such as Selgin (1988) and White (1999) have argued that a free banking system would be a means to inhibit the excessive credit expansion that causes business cycles. They maintain that the competition between banks would limit the credit expansion of the banking system effectively. Other Austrians such as Rothbard (1991) and Huerta de Soto (2006) have gone further and advocate a 100 percent re - rerve banking system ruling out credit expansion altogether.3 In this article it is argued that a 100 percent reserve system can still bring about artificial booms by maturity mismatching if there is a central bank or government support and guarantees for the ban king system. Even if we accept the case for a 100 percent re - serve requirement, we see that the maturity mismatching of liabilities and assets (borrowing short and lending long) is itself perilous–and in the same sense that fractional reserves are perilous.

Coupling system of carbon emission and social economy: A review

With increasing international attention on the coupling system of carbon emission and social economy, governments need to formulate relevant policies and measures to control carbon dioxide and other greenhouse gas emissions. The social cost of carbon (SCC) can form the basis for such steps. To investigate research on SCC, this paper examines relevant literature in China and abroad for different methods to measure carbon emissions. It further reviews research methods for studying SCC, the effects of model parameters on SCC, and the application of SCC to policymaking. The purpose of researching the measurement of carbon emissions is to select the most appropriate, accurate, and precise methods to enhance data support for research on carbon emissions (including the measurement of social costs). Recording different models facilitates the estimation of SCC for more suitable and exact estimation methods. Analyzing the effects of model parameters on SCC clarifies decision-making and exogenous variables regarding estimating SCC, including the impact of equity weight, uncertainty, risk aversion, and discount and time preference rates on the value of SCC. Therefore, this paper reviews existing research on SCC policy to help frame policymaking appropriately, using the social cost of carbon emissions.

Growth and income distribution in an economy with dynasties and overlapping generations

By building a growth model with two classes–workers and capitalists–this study investigates the existence and stability of the long-run equilibrium along the lines of Pasinetti (Rev Econ Stud 29:267–279, 1962) and Samuelson and Modigliani (Rev Econ Stud 33:269– 301, 1996), and examines the dynamics of income distribution. Unlike preceding studies in which the propensity to save of each class is exogenously given, this study assumes that workers solve a two-period overlapping generations (OLG) model, while capitalists solve an infinite-horizon dynamic optimization model. Depending on the combinations of both classes’ time preference rates, parameter of the production function, population growth rate, technological progress rate, and depreciation rate, we obtain two kinds of long-run equilibria: the Pasinetti steady state and the dual steady state as per Samuelson–Modigliani. We show that under realistic values of the parameters, the economy is likely to converge to the Pasinetti steady state. Moreover, by using numerical simulations, we show that a decrease in economic growth rate increases the wealth share of capitalists while decreasing that of workers, and that it increases (decreases) the income share of capitalists while it decreases (increases) that of workers if income share is measured in terms of gross (net) income share.

Capital Income Taxation under Full loss offset Provisions of a Prospect Theory Investor

In this paper we examine capital income taxation of a reference dependent sufficiently loss averse investor in a two period portfolio choice model under full loss offset provisions. Capital income taxation with loss offset provisions has been found to stimulate risk taking in expected utility models under certain assumptions about attitudes towards risk but would such effect be found under prospect theory type of preferences? We observe that the impact of capital income taxation depends on investors’ reference levels relative to their endowment income and thus we explore capital income taxation for different types of loss averse investors in terms of their ambition. We consider the less ambitious investors to be the ones with relatively low reference levels (they avoid relative losses in both periods) and more ambitious investors to be those with relatively high reference levels. We analyze two types of more ambitious investors: investors with higher time preference (who experience relative losses only in the second period under the bad state of nature) and investors with lower time preference (who experience relative losses only in the first period). We observe that capital income taxation stimulates current consumption in most cases which encourages risk taking, although the final outcome would depend on the investors’ degree of risk aversion, the rate of time preference and the tax rate in relation to certain thresholds. Current consumption could be discouraged for some ambitious type of investors that have relatively high second period reference levels but not necessary first period reference levels. in summary, to determine the impact of capital income taxation on the decision variables the reference levels in relation to endowment income play the most significant role. Ignoring reference depended preferences can lead to different conclusions for investors reaction to capital income taxation. We also find certain type of investors whose happiness level increases with capital income taxation under full loss offset provisions.

Can Low Retirement Savings Be Rationalized?

Simple presentations of the life cycle model often suggest a constant level of real consumption in retirement. Similarly, financial planners commonly suggest that people save for retirement in such a way as to enable them to maintain a level retirement standard of living equal to their standard of living while working. However, constant consumption with age is only optimal under the precise and unlikely condition that the subjective rate of time preference is equal to the real interest rate. Most people exhibit a positive rate of pure time preference, and additionally discount the future by both mortality and morbidity risks. In comparison, the real interest rate is roughly 0%—and the term structure of interest rates suggests this condition is likely to persist. These considerations suggest that optimal consumption in the life cycle model declines with age. This finding has major implications for optimal retirement saving. For instance, we find that for many, perhaps most, people in the bottom half of the lifetime earnings distribution, it is optimal to spend out their retirement wealth well before death and to live on Social Security alone after that. Very low earners may find it optimal to not engage in retirement saving at all. <b>TOPICS:</b>Long-term/retirement investing, portfolio theory <b>Key Findings</b> ▪ Under plausible assumptions, optimal consumption in the life cycle model declines with age. ▪ For many people in the bottom half of the lifetime earnings distribution, it is optimal to spend out retirement wealth well before death and live on Social Security alone after that. ▪ These results stand in contrast to standard financial planning advice that people save for retirement in such a way as to enable them to maintain a level retirement standard of living equal to their standard of living while working.

Financial health and obesity.

We use individual-level panel data from the English Longitudinal Survey of Ageing over the period 2004-2013 to investigate the links between financial health and obesity. We find that having no debt (high savings) is associated with a 3.6 (1.6) percentage point lower probability of having a Body Mass Index in excess of 30. Our results are robust to using different estimation methods, to measuring financial health with a subjective indicator, and adiposity with waist circumference. A lower rate of time preference and lower stress levels may be mechanisms which help to explain the association between good financial health and obesity.

The Cross-Section of Household Preferences

This paper estimates the cross-sectional distribution of Epstein-Zin preference parameters in a large administrative panel of Swedish households. We consider life-cycle model of saving and portfolio choice that incorporates risky labor income, safe and risky financial assets inside and outside retirement accounts, and real estate. We study middle-aged stock-owning households grouped by education, industry of employment, and birth cohort as well as by their accumulated wealth and risky portfolio shares. We find some heterogeneity in risk aversion (a standard deviation of 0.47 around a mean of 5.24 and median of 5.30) and considerable heterogeneity in the time preference rate (standard deviation 6.0% around a mean of 6.2% and median of 4.1%) and elasticity of intertemporal substitution (standard deviation 0.96 around a mean of 0.99 and median of 0.42). Risk aversion and the EIS are almost cross-sectionally uncorrelated, in contrast with the strong negative correlation that we would find if households had power utility with heterogeneous risk aversion. The TPR is weakly negatively correlated with both the other parameters. We estimate lower risk aversion for households with riskier labor income and higher levels of education, and a higher TPR and lower EIS for households who enter our sample with low initial wealth. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Sustainability in a Risky World

We view sustainability as a requirement that welfare should not be expected to decline over time. We impose this requirement as a prior constraint on the consumption-savings-investment problem, and study its implications for saving, risky investment, and the social discount rate. The constraint does not distort portfolio choice, but it imposes an upper bound on the sustainable time preference rate and on the sustainable consumption-wealth ratio, which we show must lie between the riskless rate and the expected return on optimally invested wealth.

The Impact of Body Mass Index on Growth, Schooling, Productivity, and Savings: A Cross-Country Study

We examine the relationship between wealth and health through prominent growth indicators and cognitive ability. Cognitive ability is represented by nutritional status. The proxy variable for nutritional status is BMI. We use the reduced form equation in the cubic specification of time preference rate, strongly related to cognitive ability, to estimate this relationship. The growth indicators utilized are GDP per capita, schooling, overall and manufacturing productivities, and savings. We estimate our models using the FE, GMM estimators, and long difference OLS and IV estimation through balanced panel data for the 1980-2009 period. We conclude that the relationship between all prominent growth indicators and BMI is inverse U-shaped. In other words, cognitive ability has a significant potential to progress growth and economic development only in a healthy status.