Nonexponential Discounting: A Direct Test And Perhaps A New Puzzle

Richard Startz and Kwok Ping Tsang

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

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 but they do not. Rising term yield premia imply discount rates that rise with longer horizons since uncertainty is much too small to account for the difference in interest rates. Such deviations from exponential discounting are large enough to make a significant 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: Social and Behavioral Sciences; intertemporal consumer choice; discounting; hyperbolic discounting; consumption; portfolio puzzles; CAPM (search for similar items in EconPapers)
Date: 2012-07-15
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Nonexponential Discounting: A Direct Test And Perhaps A New Puzzle (2012)
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