Intertemporal Preferences

Question 1

what is an assumption about time in intertemporal preferences

Answer 1

time is discounted at a constant rate. no difference between today and tomorrow, and 20 years and 20 years plus one day

Question 2

what is the discount factor

Answer 2

1 / 1 + ρ

Question 3

people prefer 100 today to 110 tomorrow but prefer 110 in 31 days to 100 in 30 days. what is this called and what is the issue

Answer 3

preference reversal, this is inconsistent with constant time discount factor

Question 4

what does discount factor show

Answer 4

measure level of impatience, lower the more impatient

Question 5

what is hyperbolic discount

Answer 5

increasing discount factor

Question 6

what does hyperbolic discount factor give you

Answer 6

the implicit discount factor over longer time horizons is then higher than the implicit discount factor over shorter time horizons

Question 7

implications of hyperbolic discounting

Answer 7

over consumption (or under-saving) procrastination of an onerous activity (O’Donoghue and Rabin (1999c,2001)) Ex: diet Recovering from addiction (Gruber et al 2000) and Carrillo (1999)

Question 8

what is a ‘naive’ person

Answer 8

believe that her future preferences will be identical to her current preferences

Question 9

what is a ‘sophisticated’ person

Answer 9

correctly predict how her preferences will change over time, aware of problem and ties own hands (tell people going to start a diet)

Question 10

explain the setting of the field experiment on savings and commitments*

Answer 10

Ashraf et al 2005, 1777 existing or former clients of bank in Philippines, three treatments: SEED treatment: pure commitment savings product that restricts access to deposits but doesn’t compensate client, marketing treatment: encourage to save, offer no commitment, control treatment

Question 11

what is results of field experiment on work effort *

Answer 11

Kaur et al, 2010, production 0 in 5+ days before payday, large increase in production in days leading up to payday, 75% people take up ‘crazy’ contract so are sophisticated (self set target, don’t get paid if don’t reach)

Question 12

explain instantaneous utility function

Answer 12

u(ct,dt), where dt represents visceral states like hunger and dieting, sexual desire and various “heat-of-the-moment” behaviours, craving and so on