Compensated Discount Functions: An Experiment on the Influence of Expected Income on Time Preferences

43 Pages Posted: 7 Jun 2014 Last revised: 12 Mar 2015

See all articles by Attila Ambrus

Attila Ambrus

Duke University - Department of Economics

Tinna Laufey Ásgeirsdóttir

University of Iceland

Jawwad Noor

Boston University - Department of Economics

László Sándor

Luxembourg School of Finance, University of Luxembourg

Date Written: March 1, 2015

Abstract

This paper examines the empirical question of whether subjects’ static choices among rewards received at different times are influenced by their expected income levels at those times. Moreover, we recover time preferences after compensating for possible income effects. Besides eliciting subjects’ preference between standard delayed rewards, the experimental design also elicited their preferences over delayed rewards that are received only if the subject’s income remains approximately constant. These preferences, along with elicited subjective probabilities of satisfying the condition, make the correction possible. We conducted the experiments in Iceland, where our prompt access to income tax records enabled us to condition delayed rewards on income realizations. We find that background income is associated with preferences over unconditional delayed rewards. While most people exhibited present bias when comparing unconditional delayed rewards, subjects with stable income did not. The results are similar for the entire sample once we correct subjects’ discount functions for income effects. This suggests that income expectations have an effect on choices between future rewards, and that this may account for some of the present-bias observed in experiments.

The Supplement for this paper is available at the following URL: http://ssrn.com/abstract=2446690

Keywords: time preferences, hyperbolic discounting, income expectations, rewards conditional on income realization

JEL Classification: C93, D03, D11, D90

Suggested Citation

Ambrus, Attila and Asgeirsdottir, Tinna Laufey and Noor, Jawwad and Sándor, László, Compensated Discount Functions: An Experiment on the Influence of Expected Income on Time Preferences (March 1, 2015). Economic Research Initiatives at Duke (ERID) Working Paper No. 168. Available at SSRN: https://ssrn.com/abstract=2446602 or http://dx.doi.org/10.2139/ssrn.2446602

Attila Ambrus (Contact Author)

Duke University - Department of Economics ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Tinna Laufey Asgeirsdottir

University of Iceland ( email )

Iceland
(354)8650821 (Phone)

HOME PAGE: http://www.asgeirsdottir.com

Jawwad Noor

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States

László Sándor

Luxembourg School of Finance, University of Luxembourg ( email )

4 Rue Albert Borschette
Luxembourg, L-1246
Luxembourg

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