Non-Parametric Test of Time Consistency: Present Bias and Future Bias

Abstract

This paper reports the elicited time preference of human subjects in a laboratory setting. I address the common confounding in the literature and develop a new method to elicit time preference. Almost all experimental researches on time preference assume that time discounting is separable from future reward and that the instantaneous utility function is linear. These two assumptions cause serious and fundamental biases in the estimation of time preference.

This paper presents a new model that allows for nonlinear utility functions, nonseparability between delay and reward, and time inconsistency including future bias in addition to present bias. In particular, the experiment (1) runs a non-parametric test of time consistency and (2) estimates the form of time discount function independently of instantaneous utility functions, and then (3) the result suggests that many subjects exhibiting future bias, indicating an inverse S-curve time discount function.

Keywords: intertemporal choice, time preference, present bias, future bias, reverse time inconsistency, increasing impatience, decreasing impatience, bypass method, hazard function

JEL Classification: C91, D81, D99