Convex Time Budgets and Individual Discount Rates in the Long Run

The purpose of this study is to use experimental data to estimate individual discount rates and test for hyperbolic discounting over a long time horizon. To do this, we employ the convex time budget experimental approach with cash payments over a 20 year time horizon. To date, there are few experimental studies that explore discount rates beyond a 1 year time horizon. Previous experimental studies that focus on short time horizons find high discount rates, which may not be applicable to decisions that affect outcomes in the distant future. Our findings are quite similar to the average rate of 4.9% found by Grijalva et al. (Environ Resour Econ 59:39–63, 2014), who similarly use a 20 year time horizon, but use the multiple price list elicitation method along with payment via government savings bonds. We find annual discounts rates in the range of 1.9–5.5%, depending on the specific model used. We also find evidence for declining discount rates, and that this hyperbolic pattern of behavior is related to the confidence subjects have in receiving distant-future payments.     

Ecological discounting

Which rates should we use to discount costs and benefits of different natures at different time horizons? We answer this question by considering a representative agent consuming two goods whose availability evolves over time in a stochastic way. We extend the Ramsey rule by taking into account the degree of substitutability between the two goods and of the uncertainty surrounding the economic and environmental growths. The rate at which environmental impacts should be discounted is in general different from the one at which monetary benefits should be discounted. We provide arguments in favor of an ecological discount rate smaller than the economic discount rate. In particular, we show that, under certainty and Cobb-Douglas preferences, the difference between the economic and the ecological discount rates equals the difference between the economic and the ecological growth rates. Using data about the link between biodiversity and economic development, I estimate that the rate at which changes in biodiversity should be discounted is 1.5%, whereas changes in consumption should be discounted at 3.2%.     

Implied discount rate and payback threshold of energy efficiency investment in the industrial sector

The industrial sector is responsible for about a third of the energy usage in the United States, and there is significant energy saving potential from the industrial sector. However, the phenomenon of “energy efficiency gap” – the scenario in which cost-effective energy efficient technologies enjoy only limited market success – appears frequently in the industrial sector. This article tries to explain this efficiency gap in the industrial sector by empirically estimating the implied discount rates and payback thresholds industrial firms use to evaluate their energy efficiency investments. Using the Industrial Assessment Centers (IAC) database from 2002 to 2011, with more than 30 000 energy efficiency recommendations, this article builds structural models of firms’ evaluation of an energy efficiency project. The model results show that the implied discount rates of medium to small industrial firms range from 40 to 45%, and the average payback threshold is about 9 months.     

Land-use changes, forest/soil conditions and carbon sequestration dynamics: A bio-economic model at watershed level in Nepal

A dynamic bio-economic model has been used at watershed level in Nepal to analyze the land-use changes, forest and soil conditions and their resultant impacts on carbon (C) sequestration. Planning horizon of the model extends over a period of 25 years. The objective function is maximization of the sum of discounted net income flows from agriculture, livestock and forestry productions; imputed value of leisure and labour hiring out activities subject to annual constraints on land, labour and capital availability along with the fulfilment of minimum cash and consumption requirements. The seven scenarios analyzed by the model are: business as usual (BAU), reduction in population growth rate from 2 to 1.5% p.a., increased prices of major crops by 10 and 20%, reduction in emigration of active labour force from the watershed from the current rate of 20–15 and 10%, and increase in discount rate from 5 to 10%. The results indicate that reduced labour emigration rates and increase in the prices of major crops lead to expansion of cultivated area and shift from one land use to the others. Land clearing becomes more severe with decline in labour emigration rate. Up to 10% increase in the prices of agricultural crops does not have noticeable effect on total land clearing. Increase in discount rate leads to less land clearing, more biomass harvesting and higher net C sequestration as compared to the BAU scenario. Assuming a C price of 10 USD per MgC and 5% discount rate, the net present value of C sequestration for the first 25 years is estimated at 1.83 mill USD in the BAU scenario, varying from 0.16 mill USD to 2.26 mill USD, as respectively the lowest and highest values for the seven scenarios analysed. A reduction in population growth and maintenance of current rate of off-farm employment are suggested for slowing down the expansion of cultivated land area, and thereby reducing the forest/soil degradation and C emissions. This in turn would enhance the income potential from C sequestration.     

Option-implied preferences adjustments, density forecasts, and the equity risk premium

The main objective of this paper is to analyse the value of information contained in prices of options on the IBEX 35 index at the Spanish Stock Exchange Market. The forward looking information is extracted using implied risk-neutral density functions estimated by a mixture of two-lognormals and several alternative risk adjustments. Our results show that, between October 1996 and March 2000, we can reject the hypothesis that the risk-neutral densities provide accurate predictions of the distributions of future realisations of the IBEX 35 index at 4- and 8-week horizons. When forecasting through risk-adjusted densities the performance of this period is statistically improved and we no longer reject that hypothesis. We show that risk adjustments based on a power specification for the stochastic discount factor—which is the approach used so far in the literature that derives the objective density function from option prices- generates an excessive volatility of risk premia. We use alternative risk adjustments and find that the forecasting performance of the distribution improves slightly in some cases when risk aversion is allowed to be time-varying. Finally, from October 1996 to December 2004, the ex-ante risk premium perceived by investors and that are embedded in option prices is between 12 and 18% higher than the premium required to compensate the same investors for the realised volatility in stock market returns.      

Spatial discounting of ecosystem services

The impact of conservation efforts targeted at preserving ecosystem services largely depend on the welfare implications associated with spatial variations in the provision of ecosystem services. While there is ample empirical evidence of spatial discounting or decay of the valuation of ecosystem services, there are still few underpinnings based on welfare economic theory. We establish a theory of spatial discounting that closely follows the concept of time discounting pertaining to climate change, and show spatial discount rates in the consumption, ecosystem service, and willingness to pay (WTP) numeraires. We consider the role of key parameters such as pure rate of spatial preference, consumption change, ecosystem services change, population density, and elasticity of marginal utility. We find that the spatial discount rate of WTP for ecosystem services that frequently appears in the empirical literature is the difference between the ecosystem service discount rate and consumption discount rate, where the ecosystem service discount rate includes both physical distance decay and welfare effects. Finally, we use numerical simulations to illustrate how the three different spatial discount rates vary with the spatial distance from the source of ecosystem services and with consumption patterns, implying many more possible spatial variations of WTP.     

A NEW APPROACH TO ASSET INTEGRATION: METHODOLOGY AND MYSTERY

Abstract. This paper develops a new methodology to test financial market integration. Our technique is based on an intertemporal asset‐pricing model, and relies on estimating and comparing expected discount rates across asset markets. Expected discount rates are allowed to vary freely over time, constrained only by the fact that they are equal across assets. Assets are allowed to have very general risk characteristics, and are constrained only by a linear factor model of covariances with the discount rate over short time periods. We provide a variety of domestic and international empirical illustrations of our technique, and find surprisingly little evidence of integration.     

Intertemporal Valuation of River Restoration

Willingness to pay for an environmental improvement is a function of how long it takes to deliver the improvement. To measure the effect of time on benefits, I utilize a discrete choice experiment that includes an attribute for delay until the improvement occurs and simultaneously estimate discount rates and valuation parameters. I estimate the present value of immediate and delayed Minnesota River Basin improvements using discount rates directly estimated from the econometric model. Compared to an immediate river basin cleanup, Minnesota residents lose almost half of the benefits when cleanup is delayed by 5 years.     

Reactions of real yields and inflation expectations to forward guidance in the United States

We study the impact of forward policy rate guidance by the Federal Reserve’s Federal Open Market Committee (FOMC) used as an unconventional monetary policy tool at the zero lower bound of the policy rate on real and breakeven US Treasury yield curves. We find that explicit FOMC policy rate guidance announcements led to a significant reduction in real yields at horizons of 2 to 5 years ahead. By contrast, long-term breakeven inflation rates were little affected, suggesting that inflation expectations have remained well anchored, and that explicit FOMC policy rate guidance has not adversely affected central bank credibility.     

A day without a search engine: an experimental study of online and offline searches

With the evolution of the Web and development of web-based search engines, online searching has become a common method for obtaining information. Given this popularity, the question arises as to how much time people save by using search engines for their information needs compared to offline sources, as well as how online searching affects both search experiences and search outcomes. Using a random sample of queries from a major search engine and a sample of reference questions from the Internet Public Library (IPL), we conduct a real-effort experiment to compare online and offline search experiences and outcomes. We find that participants are significantly more likely to find an answer on the Web (100 %), compared to offline searching (between 87 % and 90 %). Restricting our analysis to the set of questions in which participants find answers in both treatments, a Web search takes on average 7 (9) minutes, whereas the corresponding offline search takes 22 (19) minutes for a search-engine (IPL) question. Furthermore, while raters judge library sources to be significantly more trustworthy and authoritative than the corresponding Web sources, they judge Web sources as significantly more relevant. Balancing all factors, we find that the overall source quality is not significantly different between the two treatments for the set of search-engine questions. However, for IPL questions, we find that non-Web sources are judged to have significantly higher overall quality than the corresponding Web sources. In comparison, for factual questions, Web search results are significantly more likely to be correct (66 % vs. 43 %). Lastly, post-search questionnaires reveal that participants find online searching more enjoyable than offline searching.     

Discount rates and shadow prices for public investment

This paper extends the Harberger–Sandmo–Drèze model for public discount rates to a many-good economy. It derives a formula for discount rates which are specific to each public enterprise or agency and used by them to discount future outputs and inputs evaluated at market prices. Such an approach is shown to be more efficient than that of simply using a single rate for all public projects. It is also more practical than asking each public firm to use second-best shadow prices in their analyses of investment projects.The general results are first provided; then, simple cases are considered and numerical examples presented to help interpret our formula and analyse its main determinants.     

Interest rate gaps and monetary policy in the work of Henry Thornton: Beyond a retrospective Wicksellian reading *

Abstract

This paper revisits the theory of interest rates propounded by Henry Thornton (1760 – 1815). Particular attention is paid to Thornton's examination of the inflationary effects of the gap between the Bank of England's discount rate and the current rate of profit. The paper shows that Thornton is also concerned, unlike Wicksell, about the consequences of a gap between the Bank of England's discount rate and the effective bank lending rate on the market for loanable funds, which results mainly from the usury laws. Thornton's analyses offer then a framework for regulating the value of money through adjustments to the bank rate.     

Patience auctions: the impact of time vs. money bidding on elicited discount rates

We introduce, test, and compare two auction-based methods for eliciting discount rates. In these “patience auctions”, participants bid the smallest future sum they would prefer -or- the longest time they would wait for a reward, rather than receive a smaller, immediate payoff. The most patient bidder receives the delayed reward; all others receive the immediate payoff. These auctions allow us to compare discounting when participants’ attention is focused on the temporal versus monetary dimension of delayed rewards. We find that the estimated parameters in the three most commonly used discount functions (exponential, hyperbolic, and quasi-hyperbolic) differ across these two bidding methods (time-bids vs. money-bids). Specifically, our participants tend to show more impatience under time-bids. Furthermore, we find that people are more likely to exhibit exponential (as opposed to hyperbolic) discounting and exhibit less present bias under time-bids, compared to money-bids. To our knowledge, this paper is the first to directly compare time versus money preference elicitations, within the same subjects, using an incentive-compatible mechanism.     

A macroeconometric framework for monetary policy evaluation: A case study of Pakistan

This paper attempts to establish the quantitative importance of the various channels of monetary transmission by constructing, estimating and simulating a small macroeconometric model of Pakistan's monetary sector, while using data from the monetary statistics and the monetary survey of the State Bank of Pakistan over 1976–2007. The paper elucidates that the key feature of the study of monetary policy in Pakistan has been preoccupied with neglect either of the demand or the supply function of money and shows how this may lead to imprecise policy actions and mistaken conclusions. Accordingly, we delineate the transmission mechanism of monetary policy by taking into consideration all structural money demand and money supply linkages along with the historically implied identifying assumption in the framework of a marginalized macroeconometric model. The within-sample and out-of-sample evaluations of the model are found satisfactory. The paper presents results of three policy simulations from the estimated model that highlight the impact of alternative monetary policy instruments on the monetary variables under a rule-based and a discretionary policy environment. We find that (i) the SBP subscribes to an unannounced monetary policy rule, (ii) the determination of the policy rate under the announced rule environment stabilizes the monetary sector in that convergence to full equilibrium is smooth and rapid, (iii) a 100 bps reduction in the discount rate, ceteris paribus, decreases money supply by 4.97%, and (iv) the long term implication of reducing (increasing) the reserve requirement ratio on time (demand) deposits, ceteris paribus, is only higher inflation. Finally, we establish that a 100 bps increase in interest rate increases money supply by 3.14% in full equilibrium.     

Temporal insensitivity of willingness to pay and implied discount rates

A number of studies have defined and tested the temporal sensitivity of willingness to pay to payment schemes and the resulting implied discount rates for environmental projects. We demonstrate that those studies have imposed restrictive assumptions on the structure of the willingness to pay function and the underlying decision process. We investigate the temporal sensitivity of willingness to pay using a new temporal willingness to pay function applied to a proposed oyster reef restoration program. We find that (1) holding the length of the project constant, the temporal willingness to pay for the project is the same across different payment schemes, (2) temporal willingness to pay does not vary significantly across projects of varying lengths, and (3) estimated discount rates are low relative to previous studies, but vary significantly across payment schemes and project lengths.     

Discounting in a world of limited growth

This paper explores the consequences fordiscounting of assuming limits to growth. One of the main determinants of the discount rate is the rate of economic growth. If growth rates decline in the future then the discount rate should not be constant but also decline over time. In fact, we would then need not a single discount rate but rather a variable discount schedule. This would imply higher present values for the distant future. The paper analyses how discount rates would vary with different assumptions about the patterns of growth and the pure rate of time preference.An earlier version of this paper was presented at the conference ECOLOGICAL ECONOMICS, Stockholm, August 1992. I am grateful for valuable comments from Partha Dasgupta, Gunnar Köhlin, Karl-Göran Mäler, Mike Young and two anonymous referees.     

Fishermen's Discount Rates in ITQ Systems

In this paper the fishermen's planning and investment horizon is investigated using their discount rates. It is shown that one might calculate the implicit discount rate in an ITQ regulated fishery from the available information from the quota market. This gives information about how well the system is working. In particular, discount rates where ITQ systems are in operation initially were very high, before they started to decrease. This implies that it take some time to reap the full benefits of an ITQ system. It also gives arguments for not letting ITQs be perpetual property rights, and hence, enables more flexibility in the management system.     

Central banks' voting records,the financial crisis and future monetary policy

We examine whether central banks' voting records help predict the future course of monetary policy in the Czech Republic, Hungary, Poland, Sweden and the United Kingdom, controlling for financial market expectations. Unlike previous research, we first examine the period of the global financial crisis, characterized by a high level of uncertainty, and second, examine the predictive power of voting records over longer time horizons, i.e., the next monetary policy meeting and beyond. We find that voting records predict the policy rate set at the next meeting in all central banks that are recognized as independent. In some central banks, voting records are found—before, but not during, the financial crisis—to be informative about monetary policy at even more distant time horizons.     

Combination forecasts of tourism demand with machine learning models

The main objective of this study is to analyse whether the combination of regional predictions generated with machine learning (ML) models leads to improved forecast accuracy. With this aim, we construct one set of forecasts by estimating models on the aggregate series, another set by using the same models to forecast the individual series prior to aggregation, and then we compare the accuracy of both approaches. We use three ML techniques: support vector regression, Gaussian process regression and neural network models. We use an autoregressive moving average model as a benchmark. We find that ML methods improve their forecasting performance with respect to the benchmark as forecast horizons increase, suggesting the suitability of these techniques for mid- and long-term forecasting. In spite of the fact that the disaggregated approach yields more accurate predictions, the improvement over the benchmark occurs for shorter forecast horizons with the direct approach.     

SAVINGS AND PERSONAL DISCOUNT RATES IN A MATCHED SAVINGS PROGRAM FOR LOW‐INCOME FAMILIES

The ability to save for future needs is critical to family well‐being and is especially challenging for low‐income families with little extra income and limited access to institutional structures like employment‐based retirement funds or low cost savings mechanisms. Many nonprofits and governments have created new savings vehicles to fill this void. The ability of families to succeed in these programs may depend on their personal discount rates (time preferences). In this paper, we use survey data from a matched savings program and factor analysis to characterize family time preferences in order to predict their influence on savings levels. We find that a single latent factor describing the level of discount rates (rather than other dimensions of time or amount inconsistency) best describes family differences and is significantly related to the ability of families to save within the program. (JEL D91, I30)