Measuring Time Preferences

Abstract

We review research that measures time preferences-i.e., preferences over intertemporal tradeoffs. We distinguish between studies using financial flows, which we call "money earlier or later" (MEL) decisions and studies that use time-dated consumption/effort. Under different structural models, we show how to translate what MEL experiments directly measure (required rates of return for financial flows) into a discount function over utils. We summarize empirical regularities found in MEL studies and the predictive power of those studies. We explain why MEL choices are driven in part by some factors that are distinct from underlying time preferences.

Figure 1.. Distribution of Characteristics for Recent Empirical Discounting Papers.

Note: Result of the following Google Scholar Search conducted August 2014: (discount OR discounting) AND utility AND “intertemporal choice" AND “time preferences” AND "standard errors". After eliminating duplicates and reprints, 222 publications remain. Year of publication min =1980, max=2014, mean=2009.8. Papers may appear more than once in the “Lab or Field,” “Linear Utility,” and “Rewards” columns if they fit more than one category (e.g. a paper with a lab and a field component”). The “Intertemporal Substitution” column classifies whether a paper allowed for the possibility that individuals might substitute consumption across time when estimating its discounting model (“Yes”) or assumed individuals consumed money or other rewards when they were received (“No”). The “Linear Utility” column classifies whether the paper’s model allows for non-linear utility functions in its model. The “Exponential”, “Hyperbolic”, and “Quasi-Hyperbolic” indicate whether any of those discount functions were estimated in the paper.

Figure 2.. The Shape of Different Discount Functions.

Plots of the exponential δ^τ with δ = 0.944, hyperbolic (1 + ατ)^−γ/α with α = 4, γ = 1, and quasi-hyperbolic β^1_(τ<0)δ^τ with β = 0.7, δ = 0.957.