Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2003-03-03 Number: 03-018/3 Author-Name: Bernard M.S. van Praag Author-Email: email@example.com Author-Workplace-Name: University of Amsterdam Author-Name: Adam S. Booij Author-Email: firstname.lastname@example.org Author-Workplace-Name: University of Amsterdam Title: Risk Aversion and the Subjective Time Discount Rate: A Joint Approach Abstract: This discussion paper led to a publication in the 'Journal of Economic Behavior & Organization', 2009, 70(1-2), 374-388.
In this paper we analyze a large sample of individual responses to six lottery questions. Wederive a simultaneous estimate of risk aversion γ and the time preference discount rate ρ perindividual. This can be done because the consumption of a large prize is smoothed over a largertime period. It is found that ρ and γ strongly vary over individuals, while they are negativelycorrelated with a correlation coefficient of -.3. Furthermore we explain γ and ρ by income,age, gender, entrepreneurship and an obesity index. Very significant effects are found. If weexplain γ in a simple model where time discounting is ignored, we find completely differentestimates for γ . We conclude that in the case of lotteries with big prizes a simultaneous estimateof γ and ρ is needed in order to avoid misspecification. Classification-JEL: D12; D80; D90; E21. Keywords: Expected Utility; Risk Aversion; Time Preference; Lotteries; Hypothetical Questions. File-Url: http://papers.tinbergen.nl/03018.pdf File-Format: application/pdf File-Size: 459634 bytes Handle: RePEc:tin:wpaper:20030018