Explaining the Fixed Cost Component of Discounting: The Importance of Students' Liquidity Constraints

10 Pages Posted: 26 Sep 2015

Date Written: October 2015

Abstract

Utilizing experimental data on choices over real monetary rewards made by university students, we provide evidence that two measures of liquidity, income and employment status, significantly explain differences in patterns of discounting. We find an average fixed cost component of discounting in the range of $5 for unemployed students and near $0 for employed students. An increase in annual disposable income of $1000 decreases the fixed cost component of discounting by approximately $0.20 to $0.25. These findings can help resolve the puzzle that some studies in the literature find evidence of present-bias and magnitude effects and some do not.

Keywords: discounting, experiments, time preferences, present bias

JEL Classification: D90, C91, D03

Suggested Citation

Meyer, Andrew, Explaining the Fixed Cost Component of Discounting: The Importance of Students' Liquidity Constraints (October 2015). Available at SSRN: https://ssrn.com/abstract=2665154 or http://dx.doi.org/10.2139/ssrn.2665154

Andrew Meyer (Contact Author)

Marquette University ( email )

1225 W. Wisconsin Avenue
Milwaukee, WI 53233
United States
414-288-5489 (Phone)

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