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Nov
19
UCLouvain Economics Seminar - Michèle Belot, Cornell University
By UCLouvain Economics Seminar

Michèle Belot

Cornell Univesity

will give a presentation on

Eliciting time preferences when income and consumption change over time

Abstract

We propose a new method of eliciting individual time preference measures in settings where income or consumption changes over time. Standard time preference measures elicit the marginal value of money across different periods of time. If income remains constant, in standard models this identifies the discount factor. If income is volatile (and perfect smoothing infeasible), it measures the discount factor and changes in the marginal consumption utility. Our method relies on allocating lottery tickets with low winning probabilities but high rewards. In standard intertemporal choice models, the high reward decouples the allocation of lottery tickets from the current and expected future income levels (i.e., from changes in wealth and other income over time). We validate our method on experimentally on two student samples drawn from the same pool. One set of students is asked about discount factors in December at a time when their current budget is reduced by extraordinary expenditures for Christmas and Saint Nicholas gifts. The other one is asked in February when no such extra constraints exist. Finally, we apply our method to elicit discount factors from unemployed job seekers which naturally have varying income streams.