Time Preference Assumptions in Normative Analyses of Household Financial Decisions

Posted: 20 Mar 2014

See all articles by Sherman D. Hanna

Sherman D. Hanna

Ohio State University (OSU)

Kyoung Tae Kim

University of Alabama

Date Written: February 18, 2014

Abstract

Economists conducting normative analyses of household financial decisions typically assume specific values of parameters of the household utility function. We review 12 normative analyses and discuss justifications for the personal discount rates assumed. None of the normative articles cited an independent estimate of the personal discount rate. Instead, the authors made arbitrary assumptions or cited another article’s assumption. We conclude with recommendations for assumptions about the personal discount rate in normative analyses of household financial decisions.

Keywords: normative household finance, optimal saving, retirement adequacy

JEL Classification: D14, D81, D91, G11

Suggested Citation

Hanna, Sherman D. and Kim, Kyoung Tae, Time Preference Assumptions in Normative Analyses of Household Financial Decisions (February 18, 2014). Applied Economics Letters, Vol. 21, No. 9, 2014. Available at SSRN: https://ssrn.com/abstract=2411223

Sherman D. Hanna (Contact Author)

Ohio State University (OSU) ( email )

1787 Neil Avenue
Campbell 265D
Columbus, OH 43210
United States
614-292-4584 (Phone)

Kyoung Tae Kim

University of Alabama ( email )

312 Adams Hall
Tuscaloosa, AL 35487-0001
United States

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