Intergenerational justice and the social discount rate

This paper applies the Harsanyi social welfare function to the problem of determining the social discount rate. It thus views the social discount question as one of justice between generations under conditions of individual uncertainty over position, rather than as one generation's paternalism or altruism for the next generation. Whether there is an accumulation of capital for future generations is shown to depend on the form of the individual (or collective) utility function. More importantly, the approach lends some insight into the kind of institutional structure which should be used to determine the social discount rate.This paper was written while the author was a postdoctoral fellow at the Center for Study of Public Choice at Virginia Polytechnic Institute and State University. Helpful comments were received on an earlier draft from James M. Buchanan, Pierre Pestieau, and Robert D. Tollison.     

Individual laboratory-measured discount rates predict field behavior

We estimate discount rates of 555 subjects using a laboratory task and find that these individual discount rates predict inter-individual variation in field behaviors (e.g., exercise, BMI, smoking). The correlation between the discount rate and each field behavior is small: none exceeds 0.28 and many are near 0. However, the discount rate has at least as much predictive power as any variable in our dataset (e.g., sex, age, education). The correlation between the discount rate and field behavior rises when field behaviors are aggregated: these correlations range from 0.09–0.38. We present a model that explains why specific intertemporal choice behaviors are only weakly correlated with discount rates, even though discount rates robustly predict aggregates of intertemporal decisions.     

Democracy and interdependent preferences

In a democracy, the views and wishes of the citizens are to count. The problem here is how this dictum is to be understood. I suggest that a proper analysis requires that each person's preferences be seen in the context of his beliefs concerning the preferences of the others and of the preferences he would have if he held different beliefs. Preferences founded on erroneous beliefs call for special consideration. So also do certain reluctantly held preferences. I propose a decision-policy involving the identification of social equilibria of preference.     

Hyperbolic discount curves: a reply to Ainslie

Ainslie (Theory and Decision, 73, 3–34, 2012) challenges our interpretation of the properties of hyperbolic discount curves in an iterated prisoners’ dilemma (IPD) model. In this reply, we discuss the emergence of hyperbolic discount functions in the behavioral economics literature and evaluate their properties. Furthermore, we present a summarized version of our IPD model and evaluate Ainslie’s points of contention.     

Heterogeneous risk and time preferences

Assessing individuals’ time and risk preferences is crucial in domains such as health-related decisions (e.g., dieting, addictions), environmentally-friendly practices, and saving opportunities. We propose a new method to jointly elicit and estimate risk attitudes and intertemporal choices. We use a novel individual level estimation procedure based on a hierarchical Bayes methodology, which can integrate different functional forms for discounting and risk attitudes. This method provides individual level estimates, and allows us to explore the heterogeneity in the data. In addition, we report a negative correlation between risk and time preferences, implying that risk-seeking individuals are less patient and less willing to defer consumption.     

Time preferences and consumer behavior

We investigate the predictive power of survey-elicited time preferences. The discount factor elicited from choice experiments using real payments predicts various health, energy, and financial outcomes, including overall self-reported health, smoking, installing energy-efficient lighting, and credit card balance. Allowing for time-inconsistent preferences, both the long-run and present-bias discount factors (δ and β) are also significantly associated in the expected direction with several outcomes. We consider several hypotheses regarding the strength of the association between discount factors and outcomes, such as salience of the outcome or liquidity constraints.     

Dopamine receptor genes predict risk preferences,time preferences,and related economic choices

Outside of economics, researchers have recently identified genetic predictors of “sensation-seeking” that have been linked to risky and impulsive behaviors. We examine the implications of these genetic polymorphisms for economic behavior. Our analysis indicates that the 7-repeat allele of the DRD4 gene that regulates dopamine uptake in the brain predicts risk-taking and time preferences in economic experiments that allow for ambiguity, losses and discounting. These genetic polymorphisms can also be used to directly predict financial choice patterns that are consistent with previous findings in the behavioral genetics literature.     

Uncertain indemnity and the demand for insurance

This paper considers the demand for insurance in a model with uncertain indemnity. Uncertain indemnity tends to increase the demand for insurance for precautionary reasons, but it also tends to decrease the demand due to the risk created by indemnity uncertainty. When the coefficient of relative prudence is not too large, uncertain indemnity reduces the demand for insurance and partial coverage is optimal even at actuarially fair premiums. In addition, insurance may be an inferior good or a normal good, depending on the behavior of absolute risk aversion and the magnitude of the coefficient of relative risk aversion.     

Estimating discount rates for environmental quality from utility-based choice experiments

We estimate rates of time preference using a utility-based choice experiment administered to a nationally representative sample of 2,914 respondents. For the full sample, the rate of time preference is very high for immediate benefits and drops off substantially thereafter, which is inconsistent with exponential discounting but consistent with hyperbolic discounting. Estimates of the hyperbolic discounting parameter range from 0.48 to 0.61. Visitors to water bodies have low rates of discount but exhibit hyperbolic discounting, whereas those who do not visit have consistently high rates of discount and low valuations of water quality.     

Imprecise preferences and the WTP-WTA disparity

This article reports the results of a study designed to elicit willingness to pay (WTP) and willingness to accept (WTA) values for changes in the risk of nonfatal road injuries. We examine the possibility that individuals' preferences over combinations of wealth, risk, and safety are imprecise, and that this imprecision might result in the observed disparity between WTP and WTA measures of value. The results confirm that individuals' preferences for safety are significantly imprecise, but that this alone is insufficient to explain more than part of the disparity. Indeed, respondents' estimates of the minimum that they would be prepared to accept for a risk increase frequently exceed the maximum that they would be prepared to pay for an equivalent risk reduction.     

Noise and bias in eliciting preferences

In the context of eliciting preferences for decision making under risk, we analyse the features of four different elicitation methods—pairwise choice, willingness-to-pay, willingness-to-accept, and the Becker-DeGroot-Marschak mechanism—and estimate noise, bias and risk attitudes for two different preference functionals, Expected Utility and Rank-Dependent Expected Utility. It is well-known that methods differ in terms of the bias in the elicitation; it is rather less well-known that methods differ in terms of their noisiness. It has also been reported that risk attitudes are not stable across different elicitation methods. Our results suggest that elicited preferences should only be used in the context in which they were elicited, and the bias in the certainty-equivalent methods should be kept in mind when making predictions based on the elicited preferences. Moreover, conclusions should be moderated to take into account the various methods’ noise, which is generally lowest in the case of pairwise choice.     

Interpersonal dependency of preferences

Standard decision theoretic models disregard the phenomenon of interpersonal dependency of preferences. In this paper it is argued that interpersonal dependency of preferences is a serious challenge for standard utility theory. First we sketch the more philosophical aspects of the problem and then, using a simple, formal model for the two-person case, we show that interpersonal dependency of preferences generally results in indeterminacy of preferences (resp. of subjective utility).     

Mean variance preferences and the heat equation

Chipman (1979) proves that for an expected utility maximizer choosing from a domain of normal distributions with mean and variance ² the induced preference functionV(, ) satisfies a differential equation known as the heat equation. The purpose of this note is to provide a generalization and simple proof of this result which does not depend on the normality assumption.     

Subjective probabilities and utility with event-dependent preferences

This article generalizes Savage's theory to include event-dependent preferences. The state space is partitioned into finitely many events. The induced preferences over consequences are assumed independent of the underlying states within, but not across, these events. This results in an additively separable representation of preferences over acts. The dependence of the preference relation over consequences on the events is represented by event-dependent mappings of the set of consequences onto itself. Given these mappings, the preferences on acts are represented by the expectation of event-dependent utilities on the consequences with respect to unique subjective probabilities on the states.Helpful discussions with David Schmeidler are gratefully acknowledged.     

Risk preferences and changes in background risk

We present two theorems that yield necessary and sufficient conditions for first- and second-degree stochastic dominance deteriorations of background risk to increase risk aversion with respect to foreground risk. We require that any change in a foreground risk that is undesirable remains so after a background risk changes in a way that is either unfair, undesirable in the sense of reducing expected utility, or undesirable in the sense of increasing expected marginal utility. Our results thus characterize utility functions that are, respectively, vulnerable, proper, or standard with respect to changes in background risk.

Elicitation of preferences under ambiguity

This paper is about behaviour under ambiguity—that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a ‘state of the world’ with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α-MEU.