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Nonexponential Discounting: A Direct Test And Perhaps A New Puzzle
-
Richard Startz
and
Kwok Ping Tsang
Published/Copyright:
November 9, 2012
Abstract
Standard models of intertemporal utility maximization assume that agents discount future utility flows at a constant rate—exponential discounting. Euler equations estimated over different time horizons should have equal discount rates but they do not. Rising term yield premia imply discount rates that rise with longer horizons since uncertainty is much too small to account for the difference in interest rates. Such deviations from exponential discounting are large enough to make a significant difference in consumption choices over long horizons. Our results can be viewed as providing estimates of horizon-specific discounts, or as a further puzzle concerning intertemporal substitution and uncertainty.
Keywords: intertemporal consumer choice; discounting; hyperbolic discounting; consumption; portfolio puzzles; CAPM
Published Online: 2012-11-9
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Keywords for this article
intertemporal consumer choice;
discounting;
hyperbolic discounting;
consumption;
portfolio puzzles;
CAPM
Articles in the same Issue
- Advances Article
- Life Cycle Dynamics of Income Uncertainty and Consumption
- Immigration, Fiscal Policy, and Welfare in an Aging Population
- Contributions Article
- Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries
- How Much Did the 2009 Australian Fiscal Stimulus Boost Demand? Evidence from Household-Reported Spending Effects
- Economic Growth and Political Survival
- Exchange Rate Uncertainty and Trade
- Monetary and Macroprudential Policy Rules in a Model with House Price Booms
- A Unified Framework for Using Micro-Data to Compare Dynamic Time-Dependent Price-Setting Models
- Government Policy Response to War-Expenditure Shocks
- Poverty Traps and Growth in a Model of Endogenous Time Preference
- Where Has All the Money Gone? Foreign Aid and the Composition of Government Spending
- Great Spending Crashes
- Capital Utilization and the Amplification Mechanism
- Topics Article
- Unemployment Expectations and the Business Cycle
- Sector-Specific Capital, Labor Market Distortions and Cross-Country Income Differences: A Two-Sector General Equilibrium Approach
- A Dynamic Theory of Competence, Loyalty and Stability in Dictatorships
- Coordination Failure in Investment, Economic Growth, and Volatility
- Openness, Imported Commodities and the Sacrifice Ratio
- Consumption, Leisure and Borrowing Constraints
- A Credibility Proxy: Tracking US Monetary Developments
- Estimating Information Rigidity Using Firms' Survey Data
- Has the Fed Reacted Asymmetrically to Stock Prices?
- News Shocks, Productivity and the U.S. Investment Boom-Bust Cycle
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