Nonexponential Discounting: A Direct Test and Perhaps a New Puzzle

40 Pages Posted: 11 Dec 2008 Last revised: 7 Aug 2012

See all articles by Richard Startz

Richard Startz

UCSB

Kwok Ping Tsang

Virginia Polytechnic Institute & State University

Date Written: July 6, 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. They do not. Rising term yield premia imply discount rates that rise with longer horizons, as uncertainty is much too small to account for the difference in interest rates. Such deviations from exponential discounting are large enough to make a large 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 CAPM

JEL Classification: D11, D91, E21

Suggested Citation

Startz, Richard and Tsang, Kwok Ping, Nonexponential Discounting: A Direct Test and Perhaps a New Puzzle (July 6, 2012). Available at SSRN: https://ssrn.com/abstract=1313355 or http://dx.doi.org/10.2139/ssrn.1313355

Richard Startz (Contact Author)

UCSB ( email )

Department of Economics
University of California
Santa Barbara, CA 93106-9210
United States
805-893-2895 (Phone)

Kwok Ping Tsang

Virginia Polytechnic Institute & State University ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

HOME PAGE: http://https://sites.google.com/site/byrontkp/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
70
Abstract Views
1,015
rank
442,254
PlumX Metrics