Rate Of Time Preference Research Articles

The COVID-19 pandemic, lifetime consumption, and endogenous discounting under a Stone–Geary-type preference: given the passage of three years

ABSTRACT In this paper, we consider the impact of the COVID-19 pandemic on medium- to long-term lifetime consumption profiles. Previous studies have focused on the attributes of health damage that are the primary determinant of people’s time preference rate. This approach has also been applied to research on the impacts of the COVID-19 pandemic on individual consumption profiles. However, such a framework has one drawback: consumption levels among the aged were estimated to be much lower than they actually were. We address this drawback and further brush up on the existing results by adopting a Stone–Geary-type utility function. Despite this, the key findings based on the analysis are maintained. This paper attempts to make new estimates that also consider the experience of the pandemic over 3 years. Taken together, the negative impact on economic welfare is large in scale and may cause long-term problems in terms of social policy that cannot be overlooked.

Estimating social discount rate for government investment projects in Russia

The article explores methods of estimating discount rate for investment projects financed with budgetary funds and aimed at creating social benefits. Social benefits often do not have a direct monetary value, so the methods for determining the discount rate for such projects differ from market ones. Spending budget funds on investment projects means that society gives up consumption at the current moment in time for the sake of future return on investment. The discount rate should reflect public preferences regarding the distribution of consumption between the current and future periods. The method for estimating these preferences is called the social rate of time preferences. Another approach to determine the discount rate allows one to consider the alternative possibility of implementing a project in the private sector (social opportunity cost of capital). The article describes the development of methods for evaluating the social discount rate and discusses the possibilities of their application for Russia. The value of the social rate of time preferences, equal to 2.5%, and the value of the social opportunity cost of capital, equal to 4.4—5%, are substantiated for short-and medium-term public investment projects in Russia. Rates are given in real terms.

The Social Discount Rate: Legal and Philosophical Underpinnings

Discounting of deferred impacts of government policies is a long-established practice that has been the target of substantial litigation and continued philosophical debate. Legal challenges to the social rate of discount have resulted in general acceptance of the principle of discounting at a nonzero rate for both monetary and nonmonetary impacts. Courts have displayed a general familiarity with discounting and often require transparent justification for the selection of the discount rate based on established scientific principles. The philosophical issues are more wide-ranging and include whether nonmonetary impacts should be discounted, the use of the opportunity cost of capital or the social rate of time preference, the time frame that is pertinent for setting the discount rate, and determination of whose preferences should have standing. Intergenerational issues are particularly challenging, raising questions regarding which generation's preferences should be recognized, the potential for dynamic inconsistencies arising from preferential discount rates, and intertemporal inequities. Benefit-cost analyses that include appropriate recognition of benefits and costs for future generations serve a constructive function in providing a mechanism for recognizing future effects on social welfare.

Time preference and economic growth: The case for China and international comparisons

AbstractIn this paper, first, we measure Chinese time preferences as a whole and by region based on the Euler equation under an assumption of rational expectation. The calculating results show that the rates of Chinese time preference are markedly low for most hypothetical risk attitudes over the concerning period, and there exists heterogeneity in time preferences across regions in China. Second, compared with the estimates for other advanced and emerging countries under the same assumptions and same methodology, the rates of Chinese time preference are the lowest for any given risk preference, suggesting that Chinese are more patient during the time of our examinations. Third, our measured time preferences are powerful in predicting China's high saving rates and rapid growth rates of gross domestic product. In addition, the differences in economic growth rates between China and other sample countries can be partially explained by the differences of estimated cross‐countries time preferences within our sample period. Fourth, we investigate the additional factors that affect the Chinese time preferences. Our study provides insights on the regional and international differences in economic growth rates and other economic outcomes.

Relationship between Delayed Breast Cancer Diagnosis and Behavioral Economic Factors and Personality Characteristics.

Delays in breast cancer diagnosis can allow the disease to progress to an incurable stage. However, factors that cause patients to delay seeking treatment are unclear. In this study, we aimed to identify behavioral economic factors and personality characteristics of patients with breast cancer who had a delayed diagnosis. We analyzed questionnaires completed by 41 patients with breast cancer. A delayed diagnosis was defined if the time between the first symptom and the medical visit was more than 6 months. We found 11 patients who had a delayed diagnosis. The significant characteristics associated with patients with breast cancer who had delayed diagnosis were: (i) less experience with breast cancer screening; (ii) progressive disease stage; and (iii) low time and future time preference. We found no significant behavioral economic factors other than time preference, and personality that differed between patients with breast cancer who did and did not have a delayed diagnosis. Low time preference rate is a characteristic of patients with breast cancer who had a delayed diagnosis.

Asset Pricing Model and Economic Activity of Firms

This study derives the asset pricing model by introducing the economic activity of firms in the business cycle model which explores the expected returns of stocks and sheds light on the equity premium risk. Such a model follows the discrete-time optimization to come up with the asset pricing model that includes the economic activity variable. The result shows that the considerable factors affecting the rate of stock returns at a time are the rate of time preference, the firm investment at a time , the stock price, and the growth rate of private consumption at the time. Therefore, the economic activity of firms influences the expected returns on stock in a positive direction. In contrast, the growth rate of consumption has the opposite impact on the expected rate of stock returns.

MEASURING THE SOCIAL WELFARE OF A SOLAR POWER PLANT IN WEST AFRICA - A SOCIAL RETURN ON INVESTMENT (SROI) MODEL

The purpose of the paper is to present an example for the electrification of rural Africa. We will discuss the preconditions, necessities and obstacles of building a solar power plant in rural Niger. For the energy supply of a small village in West Africa a solar pilot plant (20 kWp solar plant with battery storage) is installed. This energy hub makes it possible to provide solar-powered electricity for the town, operate a (ground) water pumping system-delivering water for households and for irrigation of fields. The aim of the paper is to determine the social and individual welfare effects of the new energy system. Therefore, the social well-being of the village is analysed by the social return on investment (LSROI) model. The analysis starts with an empirical survey of the households of the village. The villagers were asked to assess the benefits of the new solar power plant investment for their household and for the whole village. Investment and household valuation are intertemporal decisions whose consequences occur at different points in time, and social actors may have different time preferences. Therefore, two different discount methods are considered. The classical standard discounting model for the technical investment and the hyperbolic discounting for the discounting of the utility of the pilot plant for the households. Four different time preference rates (0%, 1%, 5%, 10%) are used to capture different risk assumptions caused by the current global and local risks (rising energy and food prices, corona pandemic, climate change, water scarcity) and defining thereby the social time preference space. The social return on investment model determines the social return on investment for the households of the village. By rising the time preference rate from 0% to 10% a significant decline of the social benefits of the solar pilot plant can be determined. The global and local risks will rise the time preference rate of the villagers because the present becomes more and more difficult to manage and the visible future is reduced. Hence, the social revenues of the pilot plant decrease over time.

Subsistence consumption and natural resource depletion: Can resource-rich low-income countries realize sustainable consumption paths?

This contribution is concerned with efficient use of a resource if households are characterized by Stone–Geary preferences with a minimum subsistence level of consumption. Subsistence consumption implies particular minimum requirements for initial endowments with reproducible man-made capital and resources. If these are not met, the economy is not able to cover subsistence consumption such as nutrition. Focusing on the steady state, we find that the equilibrium can be governed by zero or positive growth. The latter occurs if the rate of exogenous technical change exceeds the rate of time preference. In the former case, we can show that Hartwick’s investment rule applies in a steady state. Finally, we calibrate the model for developing but resource-rich countries and trace the full dynamic development of the economy. Furthermore, we evaluate this full adjustment process regarding several sustainability indicators.

Changing the Discount Rate by Adjusting the Pure Rate of Time Preference

The Ramsey (1928) equation decomposes the real discount rate into the pure rate of time preference plus a term that accounts for the changing marginal utility of consumption. Discussions about the appropriate discount rate to apply in Cost Benefit Analysis sometimes refer to variations induced by alternative values of the pure rate of time preference as if the two vary on a one-to-one basis. But the optimal consumption path, which determines the marginal product of capital and hence the discount rate, depends on the rate of time preference. Hence the discount rate depends on time preference through the marginal utility term. We derive an analytical expression of this relationship and show that the derivative of the discount rate with respect to time preference only equals unity in the steady state and converges from below. We estimate the derivative using US data from 1930 to 2015. Based on a semi-parametric regression model with time-varying coefficients we find it is about 0.9, but we cannot rule out 1.0 being included in the 95% confidence interval. The implied pure rate of time preference after 1980 is about 1.6 percent.

Social bias, not time bias

People seem to have pure time preferences about trade-offs concerning their own pleasures and pains, and such preferences contribute to estimates of people's individual time discount rate. Do pure time preferences also matter to interpersonal welfare trade-offs, including those concerning the welfare of future generations? Most importantly, should the intergenerational time discount rate include a pure time preference? Descriptivists claim that the intergenerational discount rate should reflect actual people's revealed preferences, and thus it should include a pure time preference. Prescriptivists claim that the intergenerational discount rate should be based on moral analysis, and thus they (often) claim that the rate of pure time preference should be zero. I argue that regardless of which view is correct, a focus on pure time preference is misplaced. First, the most plausible interpretation of descriptive preferences for intergenerational trade-offs is that people are socially biased and not time biased. Second, social bias is superior to time bias as a prescriptive reason to discount the welfare of future people. Third, recent advances in measuring social bias as a social discount rate make social bias a viable replacement for time bias in economic analyses of intergenerational welfare trade-offs.

Determinants of COVID-19 masking among artisanal fisherfolks in Ghana: the role of time discounting

PurposeDaily COVID-19-related morbidity and mortality rates are still high globally, and masking is considered a reliable method of preventing its infections. Yet, the rate of voluntary compliance with masking remains very low in most parts of the world, especially in developing countries. The authors hypothesize that the decision to wear a mask entails some benefit-cost analysis that involves time discounting. In addition, the authors surmise that feel-good benefits from pro-social behavior and from wearing fashionable masks are substantial.Design/methodology/approachThe study is based on a survey of 900 fishermen and fish traders in Ghana. A simple experiment was designed to elicit individual rates of time preference. In addition, the fishers were asked questions about their political affiliation and knowledge of the COVID-19 pandemic, among others. A logit model is used to investigate the determinants of the decision to wear a mask.FindingsThe authors found that masking compliance increases in time discounting for fishmongers, suggesting that private benefits from pro-social behavior or feel-good benefits from wearing a mask are very strong. In addition, those who belonged to the ruling political party were more likely to wear a mask. Other factors increasing the likelihood of masking include affiliation with the ruling political party, knowledge of COVID-19 and knowledge of someone who lost his/her job due to COVID-19.Originality/valueTo the best of the authors’ knowledge, this is the first study to investigate the effect of time discounting on the voluntary compliance of a health safety measure, which could provide a direct utility. In addition, the study explores the effect of political affiliation on voluntary masking behavior.

Why do people oppose foreign acquisitions? Evidence from Japanese individual-level data

This study empirically examines the determinants of individuals’ attitudes about inward foreign direct investment (FDI) using responses from questionnaire surveys that were originally designed. Individuals’ preferences for inward FDI differ between greenfield investments and mergers and acquisitions (M&A), and people are more likely to have a negative attitude toward M&A than greenfield investments. People with a negative image of the so-called “vulture fund” for foreign capital tend to oppose inward FDI, and this is more pronounced for M&A than greenfield investments. Moreover, loss aversion and high time preference rates are strongly related to opposition to inward FDI, and people with such behavioral biases tend to refuse indigenous firms to be acquired by foreign capital, even if they agree to accept greenfield investment. These results indicate that people’s preferences for inward FDI depend more on non-economic attributes than economic attributes. Our results also suggest that a lack of economic literacy is associated with unconscious biases against accepting inward FDI.

A Household’s Preferences Vary Depending on Whether Incomes Are Permanent or Temporary: A Solution to the Time-Inconsistency Problem and Equity-Premium Puzzle

A household’s preferences are usually assumed not to vary temporally or depending on the objects to which they are applied, but this assumption is often inconsistent with empirical estimates, for example, with the time-inconsistency problem of the time preference rate and the equity-premium puzzle. I show that these inconsistencies are generated because a household’s preferences vary depending on whether they are applied to permanent or temporary incomes. Preferences applied to permanent incomes are anchored to the steady state or a balanced growth path, but those for temporary incomes are not. Hence, the former is fixed and unchanged, but the latter can take various values depending on conditions. 

Impact of infectious disease pandemics on individual lifetime consumption: An endogenous time preference approach

This paper considers the impact of the coronavirus disease 2019 (COVID-19) pandemic on long-term individual lifetime consumption profiles. The framework for the analysis is a model that extends Strulik (2021) to include the government sector, where time preference is determined by individual health damage (deficit) distinct from normal aging. Thus, the health damage caused by COVID-19 changes the rate of time preference and consequently affects the Euler equation for consumption. Our theoretical contribution is the consistent incorporation of public health investment into the existing model to understand the effect of government measures against a pandemic. Numerical analysis based on this model is used to estimate changes in health status over time, trends in the rate of time preference, and individual lifetime consumption profiles, taking into account differences in age at the time of the pandemic and the nature of the government responses. Because the long-term negative economic impact would be enormous, we should avoid advocating for “living with COVID-19” without due consideration. The reopening of the economy must be accompanied by a commitment to the containment and elimination of infections with future novel coronaviruses.

Intertemporal Hedging and Trade in Repeated Games With Recursive Utility

Two key features distinguish the general class of recursive preferences from the standard model of dynamic choice: (i) agents may care about the intertemporal distribution of risk, and (ii) their rates of time preference, rather than being fixed, may vary with the level of consumption. We investigate what these features imply in the context of a repeated strategic interaction. First, we show that opportunities for intertemporal trade may expand the set of feasible payoffs relative to that in a static interaction. Two distinct sources for such trade are identified: endogenous heterogeneity in the players' rates of time preference and a hedging motive pertaining to the intertemporal distribution of risk. The set of equilibrium payoffs may on the other hand shrink drastically as many efficient outcomes become unsustainable no matter the level of patience. This “antifolk” result occurs when the players prefer stage outcomes to be positively correlated rather than independent across time. Intuitively, such preferences make it inefficient to offset short‐term losses with future gains, while this is needed to ensure that security levels are met on path. We also establish a folk theorem: if security levels are met on path, such play can be sustained in a subgame perfect equilibrium provided that the players are sufficiently patient.

Drivers of smoking and physical activity in Russia: Do individual time preferences matter?

This article analyzes the relationship between individual decisions to smoke and to do physical exercises. It is assumed that individual time preferences play a major role in explaining individual health behavior. The database is the special survey of Russians’ lifestyle conducted in 2017. A multivariate probit model with endogenous binary variable enables to analyze the relationship between smoking, doing physical exercises, and individual time preferences. Individual time preferences are determined through a hypo­thetical money experiment. An individual discount rate is used as a proxy for the rate of time preferences. We reveal that there is a negative relationship between smoking and doing physical exercises because of unobservable factors. It might be an individual inclination to follow a healthy or unhealthy lifestyle. There is a negative influence of the higher individual discount rate on doing physical exercises and a positive in­fluence of the higher individual discount rate on smoking. Social policy should accentuate the short-term benefits from smoking cessation and regular physical exercises rather than probable future health improvements. For target groups with the higher individual discount rate, highlighting the short-term negative consequences of avoiding healthy behaviors will be more effective than drawing attention to future health risks.

A defined benefit pension plan model with stochastic salary and heterogeneous discounting

AbstractWe study the time-consistent investment and contribution policies in a defined benefit stochastic pension fund where the manager discounts the instantaneous utility over a finite planning horizon and the final function at constant but different instantaneous rates of time preference. This difference, which can be motivated for some uncertainties affecting payoffs at the end of the planning horizon, will induce a variable bias between the relative valuation of the final function and the previous payoffs and will lead the manager to show time-inconsistent preferences. Both the benefits and the contribution rate are proportional to the total wage of the workers that we suppose is stochastic. The aim is to maximize a CRRA utility function of the net benefit relative to salary in a bounded horizon and to maximize a CRRA final utility of the fund level relative to the salary. The problem is solved by means of dynamic programming techniques, and main results are illustrated numerically.

Discounting in Natural Resource Damage Assessment

AbstractThe goal of natural resource damage assessment (NRDA) is to compensate the public for losses to natural resources from past or ongoing hazardous releases, including losses that may persist into the future. Compensation is delivered in the form of restoration projects. Resolving NRDA liability requires balancing losses and restoration benefits over multiple decades and converting them into a present value for calculating appropriate damages. For the past two decades, NRDA practitioners have used a real discount rate of 3 % to convert losses and benefits to a present value equivalent. That rate was based, in part, on real historical yields on risk-free debt (e.g., the real rate of return on 3-month Treasury bills). Declining interest rates on risk-free debt in recent years has led to suggestions to reexamine the historical consensus discount rate. This paper reviews two alternative conceptual paradigms for selecting a discount rate in NRDA cases: the social rate of time preference and discount rates for tort cases. We summarize historical data for empirically implementing the two paradigms and discuss the ramifications of the different options. Based on our review, we suggest maintaining the 3 % consensus as a practical solution to a range of empirical candidates within the two conceptual paradigms.

To weigh or not to weigh. Recommendations for communicating aggregated results of buildings LCA

Interpreting contradictory results of multiple midpoint environmental indicators is challenging task. Hence, partial or full aggregation into building single scores has gained ground for the clear message they convey. This paper helps to improve understanding of the possibilities and limitations of such practice. Partial aggregated scores of five buildings were explored, limited to the environmental indicators shared by the methods examined and inventoried for the case studies. In general, the buildings’ single score ranking was maintained regardless of the aggregation approach, but rank reversal is possible if e.g., ecotoxicity impact indicators are considered. Such indicators are directly influenced by the mass of metals used in a building. Furthermore, uncertainties on their results, in LCI data and in impact and damage assessment are high, and experience with them is still limited. No single best aggregation stands out per se. All of them can play their part if officially supported to ensure that coherent weights/factors are built upon solid, up-to-date data and fair intergenerational and income equity valuation procedures. In such cases, LCA practitioners are encouraged to use single scores in addition to environmental profiles or selected indicators. Overall aggregation procedures shall be transparently described, and zero pure time preference rate and equity weighting applied and explicitly declared. Sensitivity/uncertainty analysis shall be performed to assess results robustness, potential ranking reversal risks, and the effect of different discount rates. When partial aggregation is alternatively pursued, it shall be based on endpoint categories.

An Extended Theory of Rational Addiction

This study extends the rational addiction theory by introducing an endogenous discounting of future utilities. The discount rate depends on habits accumulating over time because of the repeated consumption of an addictive good. The endogeneity of the discount rate affects consumption decisions via a habit-dependent rate of time preference and discloses a patience-dependence trade-off. The existence of a steady state in which habits do not grow and its optimality are proven. The local stability properties of the steady state reveal that the equilibrium can be a saddle node, implying smooth convergence to the steady state, but also a stable or unstable focus, potentially predicting real-world behaviors such as binge drinking or extreme addiction states that may drive to death. The stability of the steady state mostly depends on the habit formation process, suggesting that heterogeneity in habit formation may be a key component to explain heterogeneity in time preferences.