IZA Paper: Interpreting Time Horizon Effects in Inter-Temporal Choice

Interpreting Time Horizon Effects in Inter-Temporal Choice

Thomas Dohmen
ROA, Maastricht University,
DIW and IZA

Armin Falk
University of Bonn,
CEPR and IZA

David Huffman
Swarthmore College
and IZA

Uwe Sunde
University of St. Gallen,
CEPR and IZA

Discussion Paper No. 6385
February 2012

We compare different designs that have been used to test for an impact of time horizon on discounting, using real incentives and two representative data sets. With the most commonly used type of design we replicate the typical finding of declining (hyperbolic) discounting, but with other designs find constant or increasing discounting. As a whole, the data are not consistent with any of these usual candidate discounting assumptions, and they also imply a violation of transitivity. The results have implications for interpreting previous evidence, and pose an important puzzle for understanding inter-temporal choice.

JEL Classification: D01, D90, D03, E21

Keywords: time preference, hyperbolic discounting, self-control, dynamic inconsistency,
intransitivity