An Investigation of Time-Inconsistency

Abstract

Preference for a particular future reward over another one may reverse as time passes - a behavior defined as dynamic or time-inconsistency. The general understanding is that time-inconsistency refers to the cases where a larger-later reward is preferred over a smaller-sooner one at the outset, but the smaller-sooner reward is selected when it gets closer in time. The current paper presents five empirical studies which indicate that time-inconsistency in the other direction can also be observed: Individuals may prefer the smaller-sooner reward when both options are in the future, but they decide to wait for the larger-later reward when the smaller option becomes immediate. We find that reverse time-inconsistency is relatively more likely to be observed when the delay to (and between) the two rewards is short. In addition, we explore the relationship between reverse time-inconsistency and time discounting. Our findings imply that intertemporal preferences are more enriched than previously considered.

Keywords: time-inconsistency, reverse time-inconsistency, time preference, intertemporal preferences

JEL Classification: C91, D90, D91