WP 2011-03 Discounting Behavior: A Reconsideration
Published in 2014 in European Economic Review, Volume 71.
AUTHORS: Steffen Andersen, Glenn W. Harrison, Morten Igel Lau, and E. Elisabet Rutström
ABSTRACT. We re-evaluate the theory, experimental design and econometrics behind claims that individuals exhibit non-constant discounting behavior. Theory points to the importance of controlling for the non-linearity of the utility function of individuals, since the discount rate is defined over time-dated utility flows and not flows of money. It also points to a menagerie of functional forms to characterize different types of non-constant discounting behavior. The implied experimental design calls for individuals to undertake several tasks to allow us to identify these models, and to several treatments such as multiple horizons and the effect of allowing for a front end delay on earlier payments. The implied econometrics calls for structural estimation of the theoretical models, allowing for joint estimation of utility functions and discounting functions. Using data collected from a representative sample of 413 adult Danes in 2009, we draw surprising conclusions. Assuming an exponential discounting model we estimate discount rates to be 9% on average. We find no evidence to support quasi-hyperbolic discounting or “fixed cost” discounting, and only modest evidence to support other specifications of non-constant discounting. Furthermore, the evidence for non-constant discounting, while statistically significant, is not economically significant in terms of the size of the estimated discount rates. We undertake extensive robustness checks on these findings, including a detailed review of the previous, comparable literature.