An Experimental Analysis of Time-Inconsistency in Long-Run Projects

39 Pages Posted: 19 Aug 2008

See all articles by Zafer Akin

Zafer Akin

TOBB University of Economics and Technology

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Date Written: November 30, 2007

Abstract

In the first part of this paper, we elicit time preferences by using the experimental and econometric methods of Benhabib-Bisin-Schotter (2006). We follow the matching task procedure on money-time pairs with real rewards. Among the model specifications we use, the one with exponential discounting and quasi hyperbolic component of present bias appears to be the best model fitting the data. Unlike Benhabib et al., the present bias in the form of a fixed cost is not supported strongly by the data. In the second part of the paper, we test the theory of behavior of time-inconsistent agents in a long run project based on the quasi hyperbolic specification of O'donoghue and Rabin (2005) and Akin (2004). The preferences elicited in the first part are used to predict the behavior of agents in the long run project and categorize them based on their types. We find that the theory captures most of the subjects' observed behavior and helps understanding their types. We also find that some of the observations are compatible with alternative models, including sign effect, the preference for improving sequences, and anticipatory utility models.

Keywords: eliciting time preferences, hyperbolic discounting, experiment, long run projects

JEL Classification: C72, C91, D91

Suggested Citation

Akin, Zafer and Yavas, Abdullah, An Experimental Analysis of Time-Inconsistency in Long-Run Projects (November 30, 2007). Available at SSRN: https://ssrn.com/abstract=1118783 or http://dx.doi.org/10.2139/ssrn.1118783

Zafer Akin (Contact Author)

TOBB University of Economics and Technology ( email )

Faculty of Economics and Administrative Sciences
Söğütözü Cad. 43,
Ankara, Cankaya
Turkey
+903122924216 (Phone)

HOME PAGE: http://www.etu.edu.tr/~zafer.akin/

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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