Rate Of Time Preference Research Articles

An analysis of efficiency of time-consistent coordination mechanisms in a model of supply chain management

In this paper, we study an advertising dynamic game in supply chain management under the assumption that the agents differ in their time preference rates. We study two coordination mechanisms: the cost sharing program, where the retailer can get some reimbursement of the advertising cost from the manufacturer; and the vertical integration, where the two players aim to maximize the joint profit. We derive the time-consistent cooperative advertising strategies in each coordination setting, and we compare them with the non-cooperative case. Our results show that, the cost sharing program is Pareto superior to the non-cooperative setting, while vertical integration could be more preferred by the manufacturer and less preferred by the retailer if the initial goodwill level is sufficiently high. Besides, unlike previous results in the literature, we found that when the agents’ discount rates are very different, joint profits could be lower under vertical integration than in the non-cooperative case, which yields an inefficient cooperation.

Determining discount rates for the evaluation of natural assets in land-use planning: An application of the Equivalency Principle

One of the most pressing issues when making decisions over long-term environmental problems is deciding on an appropriate discount rate. This can be a highly technical discussion. While some argue in favour of market rates, which usually tend to be high, others support the use of near-zero rates to ensure that both current and future generations are properly accounted for. This paper presents an alternative approach to determining the discount rate for environmental assets in the case of land-use planning - the Equivalency Principle (EP) - based on the normative proposition that the social value of protected natural land should be at least the same as the market price of an adjacent land with similar environmental characteristics that has been granted permission for development. The paper first provides a theoretical overview of the approach, followed by an application of the EP at the land plot level across 11 European countries. Based on the EP, pure rates of social time preference that would equate natural and development land values within each administrative unit have been calculated. The findings show that the application of the EP usually results in discount rates that are lower-than-market rates and that are geographically differentiated. This implies discount rates that account for preferences of the society where the land or natural resource is located, with results ranging between 0% and 11%, with an average rate of 1% across study sites.

On the long-run wealth distribution in a simple Ramsey model with heterogeneous households

This paper analyzes the long-run wealth distribution in a Ramsey model where individuals have a common rate of time preference but different intertemporal elasticities of substitution. As a result, it is shown that heterogeneity among households in intertemporal substitution is sufficient for the existence of a non-degenerate long-run wealth distribution. We also investigate the properties of the long-run wealth distribution and the transition of capital and consumption using the phase diagram.

The Long-Run Non-Neutrality of Monetary Policy: A General Statement in a Dynamic General Equilibrium Model

ABSTRACTThis paper provides an explanation of the long-run non-neutrality of monetary policy in a dynamic general equilibrium (DGE) model with microfoundations. If the rate of time preference is endogenous there is no natural rate of interest. Therefore, if the central bank follows an interest rate rule this will affect the real rate of interest in financial markets and thereby the real economy. In principle, there is a negative relationship between the real rate of interest and the rate of inflation. This turns out to be nothing other than the historical forced savings effect, or the 20th century Mundell-Tobin effect.

A Study on Consumption Behaviors of Each Generation in Mongolia in Transition Countries

In this research, the money illusion not only has arisen, but it was checked that a time preference rate is not constant. If it is consumed as the younger age group and a rate of time preference changes with generations, it will be thought that 1-dollar value changes with generations. That is, even if the loss of the same amount produces the younger age group and an old age layer, if it is the younger age group, a loss may also feel the loss by a money illusion small. That is, the time preference rate which affects consumption smoothing also affects a money illusion. The difference for every generation of a time preference rate becomes larger than the influence which only consumption smoothing has on people’s economical action. It has a possibility of bringing a big difference to the economical action for every generation. If the preference of a between at the different time changes with generations, the consumer behaviors at a certain time not only differ for every generation, but it will be thought that the reactions to a loss also differ.

Private and social time preference for health outcomes: A general population survey in Iran.

Despite the recent increase in economic evaluations of health care programs in low and middle income countries, there is still a surprising gap in evidence on the appropriate discount rate and the discounting of health outcomes such as quality adjusted life years (QALYs). Our study aimed to calculate the implied time preference rate for health outcomes in Iran and its key determinants. Data were gathered from one family member from each of the 650 households randomly selected in Tehran. The respondents’ private and social preferences for health outcomes were calculated using the time trade-off (TTO) technique based on the discounted utility model. We investigated the main assumptions of the discounted utility model through equality of mean comparison, and the association between private time preference and key socio-economic determinants using multilevel regression analysis. The mean and median implied rates were 5.8% and 4.9% for private time preference and 25.6% and 20% for social time preference respectively. Our study confirmed that magnitude, framing and time effects have a significant impact on implied discount rates, which means that the conventional discounted utility model’s main assumptions are violated in the Iranian general population. Other models of discounting which apply lower rates for far health outcomes might provide a more sensible solution to discounting health interventions with long-term impacts.

Time-Inconsistent Preferences, Retirement, and Increasing Life Expectancy

We study consumption behavior, retirement decisions, and endogenous growth within a dynamic equilibrium when individuals have present-biased preferences. Compared to individual with exponential preferences, individual with hyperbolic preferences will choose to retire early for present-biased preferences but to delay retirement for the initial time preference rate. We extend the benchmark equilibrium model to age-dependent survival law and solve numerically the equilibrium effects. It shows that, at the same age, the consumption-capital ratio may have slightly positive effect on increasing life expectancy before retirement but has a significantly positive effect on it after retirement.

Time Preferences, Intertemporal Optimization, and the Permanent Income-Life Cycle Hypothesis

This paper analyzes how the three lines of development, namely, the structure of dynamic recursive preferences, Pontryagin's maximum principle, and the permanent income-life cycle hypothesis, are interrelated in the context of consumer choice in continuous time. First, by introducing variational changes in consumption around two different points in time that are compensating to the lifetime utility or having canceling effects on asset accumulation, we define and compute the marginal rates of substitution and transformation and express the optimality condition in terms of the instantaneous time rates of change of these rates. This condition is then related to the Bohm-Bawerkian and Fisherian rates of time preference, which are defined, calculated, and shown to give an equivalent measure whether inclusive of the first order change of consumption or not. The Keynes-Ramsey rule of consumption is related to this optimality condition and is given a new interpretation. Second, we inquire into the preference basis of the permanent income-life cycle hypothesis and show explicitly that the proportionality of optimal consumption to wealth and permanent income follows from the homotheticity of recursive time preferences and a dynamic budget constraint, thereby confirming that the hypothesis, as originally conceived by Friedman and Modigliani-Brumberg, is a dynamic version of the static demand under homothetic preferences.

Commodity Money, Free Banking, and Nominal Income Targeting

Some have argued that nominal income targeting is desirable because it would replicate characteristics of a free banking regime. However, the degree to which this is true and desirable depends on the properties of commodity-based monetary regimes. In this paper, I provide a model of commodity money. I find that a pure commodity money regime can only generate an efficient stationary equilibrium by divine coincidence or by giving policymakers control over the supply of the commodity. The introduction of bank notes makes it much more likely that the economy will achieve an efficient equilibrium. In particular, in a commodity-based system, bank notes are equivalent to call options on the commodity, and the commodity holdings are equivalent to a put option on the commodity. Assuming that there is no risk-free arbitrage in equilibrium, then both bank notes and the commodity will have an expected rate of return equal to the risk-free rate. If the risk-free rate is equal to the rate of time preference, then this commodity regime is efficient. A free banking system would therefore not only minimize deviations between the supply and demand for money, but it would also (potentially) implement the Friedman rule. Both market-based and more conventional nominal income targeting regimes are unlikely to replicate both features of a free banking system unless the nominal income target has a deflationary bias.

Towards urban-rural sustainable cooperation: Models and policy implication

In the process of urbanization, many developing countries have had, or are being confronted with severe imbalance between urban and rural development, which causes serious un-sustainability. To address these challenges, this paper designs models to explore an ‘urban-rural sustainable cooperation’ pattern, with the idea of realizing 'green poverty reduction' in rural areas. Firstly, the infinitely repeated game model with trigger strategy is employed to prove the feasibility of establishing long-term urban-rural cooperation mode, with two conditions of low time preference rate and high efficiency of utilizing resource. Then this paper further discusses four requirements to enhance the accomplishment of green poverty reduction by cost-benefit analysis model: high antipollution costs afterwards, low time preference rate, the society's urgent need for environmental restoration, and high output gains without destroying environment. Lastly, this paper puts forward targeted policy proposals accordingly for relieving urban-rural imbalance problems in developing countries.

Asymmetries in utility functions and marriage decisions: A Ramsey-Koopmans approach

This paper determines an empirical indicator for the cost of marrying a spouse with a different level of impatience or rate of time preference, and/or a different degree of aversion to intertemporal variability in consumption. Empirical data from different published sources are used to calibrate the model.

A time preference measure of the social discount rate for Iran

Public sector projects in Iran are inefficiently carried out for reasons of mismanagement and poor prioritization. This problem may arise from the lack of a generally accepted social discount rate for project appraisal. The value of the social discount rate can have implications for resource allocations. The aim of this paper is to estimate the appropriate value of a social discount rate for Iran using the social time preference rate approach. The overall result indicates that the social discount rate for Iran is 5.8%.

Estimates of the social cost of carbon: A review based on meta-analysis

There is a great deal of evidence that climate change affects socioeconomic systems. The social cost of carbon (SCC) is calculated by scientists to monetarize the incremental unit of carbon emission and is used to assess climate policies. This study begins with a review of current research on the SCC, followed by a discussion of the choice of models for the SCC. We give a list of advantages of disadvantages of each model and finally use a meta-analysis to evaluate the SCC from published research. The main findings were as follows. (i) Integrated assessment models (IAMs) are often employed to assess the SCC, research on IAMs was started booming in the 1990s and slightly decreased after 2012. (ii) The estimated SCC ranges from −50 to 8752$/tC (−13.36–2386.91$/tCO2), with a mean value of 200.57$/tC (54.70$/tCO2) and it equals to 112.86$/tC (30.78$/tCO2) with a PRTP at 3% in peer-reviewed studies. (iii) The estimated SCC is higher in newer publication year and in peer-reviewed studies, the same trend happens with a higher climatic sensitivity and employing DICE/RICE and PAGE. (iv) The pure rate of time preference (PRTP) is tightly associated with the estimated SCC, and a higher PRTP has a lower estimated SCC. (v) The outliers often appear without realistic scenario setting and in studies have not peer-reviewed.

The Discount Rate for Assessing Intragenerational Natural Resource Damages

Abstract For more than 20 years, economists have converted annual losses from injuries to natural resources caused by oil spills or hazardous-substance releases into their present-value equivalents using a 3% real discount rate. A 1999 technical paper from the National Oceanic and Atmospheric Administration provided three data series from 1981 through 1998 supporting a 3% real discount rate. However, data series for 1981 through 2016, which provide a proxy for the social rate of time preference for consumption by the public, support a lower discount rate. Furthermore, recent conceptual developments imply a lower discount rate for environmental services than for produced goods and services. We present several lines of evidence that support a real discount rate of not more than 2% for assessing intragenerational natural resource damages.

Estimation of a social discount rate for Turkey

Cost-benefit analysis is probably the most comprehensive method of economic evaluation for public projects. Social discount rate, which makes it possible to compare the social benefits and costs extended over a period of time, has a key role in the allocation of public resources between alternative ends via cost-benefit analysis. Public sector needs to use the correct social discount rate in order to achieve a fair allocation of the fiscal burden between generations. While a high social discount rate may place a heavy fiscal burden on future generations, a low social discount rate may cause unfeasible projects to be approved. However, although social discount rate is a crucial parameter for public project appraisals, there is a lack of updated social discount rate for Turkey. In this study, the social rate of time preference approach is used to estimate this social discount rate. To this aim, both the personal taxation and the food demand methods are employed in order to estimate the elasticity of the marginal utility of consumption, which is a critical determinant of the social rate of time preference based on the Ramsey formula. The overall results show that the social discount rate estimated using the personal tax method is 4.88%, whereas it is 4.41% using the food demand method. Since the level of tax evasion is very high in Turkey, we recommend that the value indicated by the food demand method should be used employing the autoregressive distributed lag cointegration procedure.

Hyperbolic discounting can be good for your health

It has been argued that hyperbolic discounting of future gains and losses leads to time-inconsistent behavior and thereby, in the context of health economics, not enough investment in health and too much indulgence of unhealthy consumption. Here, we challenge this view. We set up a life-cycle model of human aging and longevity in which individuals discount the future hyperbolically and make time-consistent decisions. This allows us to disentangle the role of discounting from the time consistency issue. We show that hyperbolically discounting individuals, under a reasonable normalization, invest more in their health than they would if they had a constant rate of time preference. Using a calibrated life-cycle model of human aging, we predict that the average U.S. American lives about 4 years longer with hyperbolic discounting than he would if he had applied a constant discount rate. The reason is that, under hyperbolic discounting, experiences in old age receive a relatively high weight in life time utility. In an extension we show that the introduction of health-dependent survival probability motivates an increasing discount rate for the elderly and, in the aggregate, a u-shaped pattern of the discount rate with respect to age.

Discounting by committee

We study a dynamic social choice problem in which a sequence of committees must decide how to consume a public asset. A committee convened at time t decides on consumption at t, accounting for the behaviour of future committees. Committee members disagree about the appropriate value of the pure rate of time preference, but must nevertheless reach a decision. If each committee aggregates its members' preferences in a utilitarian manner, the collective preferences of successive committees will be time inconsistent, and they will implement inefficient consumption plans. If however committees decide on the level of consumption by a majoritarian vote in each period, they may improve on the consumption plans implemented by utilitarian committees. Using a simple model, we show that this occurs in empirically plausible cases. Application to the problem of choosing the social discount rate is discussed.

Commodity Money, Free Banking, and Nominal Income Targeting: Lessons for Monetary Policy Reform

Some have argued that nominal income targeting is desirable because it would replicate characteristics of a free banking regime. However, the degree to which this is true and desirable depends on the properties of commodity-based monetary regimes. In this paper, I provide a model of commodity money. I find that a pure commodity money regime can only generate an efficient stationary equilibrium by divine coincidence or by giving policymakers control over the supply of the commodity. The introduction of bank notes makes it much more likely that the economy will achieve an efficient equilibrium. In particular, in a commodity-based system, bank notes are equivalent to call options on the commodity and the commodity holdings are equivalent to a put option on the commodity. Assuming that there is no risk-free arbitrage in equilibrium, then both bank notes and the commodity will have an expected rate of return equal to the risk-free rate. If the risk-free rate is equal to the rate of time preference, then this commodity regime is efficient. A free banking system would therefore not only minimize deviations between the supply and demand for money, but it would also (potentially) implement the Friedman rule. Both market-based and more conventional nominal income targeting regimes are unlikely to replicate both features of a free banking system unless the nominal income target has a deflationary bias.

Keynes’s Anti Marshallian, General Theory Analysis Against the Marshallians, Robertson and Pigou, in 1937: Pigou’s 'Money Wages in Relation to Unemployment'

In August 1937, Keynes discovered that Pigou, with the very explicit and rabid support of Dennis Robertson, was planning on publishing a paper in the Economic Journal which deployed the same type of Marshallian, partial equilibrium,ceteris paribus (constant money income) analysis with functions containing only one independent variable that he had used in his 1933 Theory of Unemployment. In 1937, Pigou argued that there were two separate theories of interest rate determination. The first was that M=L(r), so that the demand and supply of money alone determined the rate of interest. The second was that M=L(Y), so that only aggregate income determined the rate of interest. Of course, there are no such functions in Aggregate Income-rate of interest (Y,r) space. Keynes correctly pointed out that the missing equation in Pigou’s paper was Keynes’s Liquidity Preference Function M=L(Y,r). Only this function exists in (Y,r) space. A subsidiary point in Pigou’s 1937 paper was that Pigou also argued that the rate of interest was equal to a constant rate of time preference. This, of course, is consistent with the deployment of a Marshallian ceteris paribus assumption about constant money income. Kaldor apparently believed that this was the central issue involved and the more important. Now Keynes knew better,but he,as the referee, allowed Kaldor to proceed because Kaldor correctly deployed Keynes’s IS-LP(LM), although Kaldor believed that it was Hicks’s model, to prove decisively in a diagram relegated to a footnote near the end of the article, that money wage cuts could only work by shifting the LP(LM) curve, which Hicks had renamed the LL curve ,to the right, so that Mw ,money in terms of wage units, would increase Y and lower as LP (LM) shifted to the right. Pigou’s 1938 comment in a note, that “I have not been able to follow the reasoning of Mr. Keynes’s short note, which preceded Mr. Kaldor’s”, demonstrates that Pigou, and Robertson, were still not able to break away from the Marshallian, partial equilibrium,ceteris paribis type of analysis that was worthless at the macro level. Pigou and Robertson could not deal with a function that had two independent variables. Pigou never mentioned Kaldor’s graphical summary in his 1938 reply because he could not understand what was being done in Keynes’s IS-LP(LM) model. Keynes used the 1937 Kaldor comment on the erroneous assumptions and analysis of Pigou,who was fully supported by D. Robertson (see letter from A. Robinson to Keynes, CWJMK, vol.14,p.239), to set up a test for the Pseudo Keynesians. Keynes offered them publications in the EJ if they would reply to Pigou’s 1938, March article by simply deploying Keynes’s LP function from p.199 of the GT to show that Pigou’s model was completely misspecified. The Pseudo Keynesian response was to reject Keynes’s extraordinarily favorable offer and attempt to sabotage the Keynesian revolution in order to advance their own false, petty, and opportunistic claims.

Measuring the neutral real interest rate in Brazil: a semi-structural open economy framework

This paper applies a multivariate Kalman filter to estimate the neutral real interest rate (NRIR) in Brazil, from 2002Q1 to 2017Q3. Our state-space representation combines semi-structural macroeconomic models with the Hodrick–Prescott (HP) filter approach. This framework differs from previous literature in two aspects: (1) instead of relying in the usual closed-economy case, we explore a reduced-form open economy’s set up, where the openness makes the NRIR to depend on world potential output and the openness degree of the economy, in addition to domestic potential output, the time preference rate and the relative risk aversion; (2) instead of imposing for potential output structures that follow random walks or have autoregressive patterns, our set of state equations for this variable relies on a production function. This work contributes to the literature in two ways: (1) we provide a simple and complementary empirical tool to evaluate the monetary policy stance in open economies that explicitly take into account the foreign output dynamics; (2) an empirical advantage of our model is to provide a single stage conditional estimation of four latent variables that are very useful for policy analyses: NRIR, potential output, non-accelerating inflation rate of unemployment and non-accelerating inflation rate of capacity utilization.