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Discount Rate Heterogeneity Among Older Households: A Puzzle?

IFS Working Paper W13/02

We put forward a method for estimating individual discount rates using field data on wealth and income. We build consumption from these data using the budget constraint. At each date, consumption transitions yield discount rates by groups of households. We apply this technique to a representative sample of older English households. We show, unsurprisingly, that there is substantial heterogeneity in discounting in that population. We fi nd a distribution of discount rates similar in shape to those previously estimated using field data, though with much lower mean values than the ones found using experimental data. But surprisingly we find that, among this older population, patience is positively correlated with education and numerical ability. This is puzzling as it goes against the negative correlation found in experiments and some fi eld investigations of time preference for younger populations. We discuss potential explanations for this result.

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