Time preference (economics)

The time preference (also present preference ) is a concept of economics and describes there, especially in microeconomics , the preference of consumers to prefer consumption in the present over future consumption. In more general terms, the time preference determines at which point in time an individual prefers to consume a certain good if he has the choice between several possible points in time ( intertemporal decision ).

As a rule, it is assumed that a consumer would prefer to enjoy a good in the present rather than in the future. Most economic models are based on this case of a positive time preference . In principle, however, it is also conceivable that a person might want to consume a good later (see anticipation ).

The concept opens up research questions on (time) inconsistent preferences as well as on hyperbolic discounting .

Time preference rate

definition

The strength of the time preference is given as the time preference rate (sometimes also called the discount rate ). It is defined as

${\displaystyle Z:={\frac {U_{0}(C_{0})-U_{0}(C_{1})}{U_{0}(C_{0})}}}$.

Here, the benefit from the perspective of the time period 0 of consumption in this period of time and the benefits from the perspective of the time period 0 of a consumption in the subsequent period, wherein:  =  is, that is, the subjective utility of consumption of both goods in the period from the perspective of the respective time period identical. ${\displaystyle U_{0}(C_{0})}$ ${\displaystyle C_{0}}$ ${\displaystyle U_{0}(C_{1})}$ ${\displaystyle C_{1}}$ ${\displaystyle U_{0}(C_{0})}$ ${\displaystyle U_{1}(C_{1})}$

In the event that today's benefit from future consumption is greater than that from today's consumption ( ), the time preference rate becomes negative. ${\displaystyle U_{0}(C_{0})<U_{0}(C_{1})}$

example

Consumer A wants to see a DVD movie. He is ready to pay € 10 for this. So  = 10 (assumption: one euro gives exactly one benefit unit). In a year his willingness to pay will be the same:  =   = 10. ${\displaystyle U_{0}(C_{0})}$ ${\displaystyle U_{0}(C_{0})}$ ${\displaystyle U_{1}(C_{1})}$

But how much cheaper would the DVD have to be in a year's time for A to wait to consume it? If it costs € 9 a year from now, he'll keep buying it today; if it only costs 7 €, he'd rather wait a year. With an expected price of 8 € he is undecided, the following applies:  =   + 2 €. ${\displaystyle U_{0}(C_{0})}$ ${\displaystyle U_{0}(C_{1})}$

Hence its rate of time preference with respect to this good

${\displaystyle Z={\frac {10-8}{10}}=20\,\%\;{\text{p.}}\,{\text{a.}}}$

Justification of time preference

This article or section needs to be revised: Present case of negative time preference. Why shouldn't the future have more value in individual cases? Are there empirical studies that examined time preferences for different regions or epochs? How has the time preference changed in Europe over the past 500 years? Some applications: Where does the time preference occur in economic models (e.g. Keynes-Ramsey rule )?
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It is discussed normatively whether and under what conditions the time preference is positive or negative. A number of arguments are made in favor of a positive time preference, which are described below. This also explains why interest is charged on borrowed money.

• The self-concept or the personal identity . What defines the current self , the wishes, goals, hopes and plans will change over time, so that the future self , at least to a certain extent, is to be assessed like another person and its benefit or well-being is therefore not complete belong to yourself. One speaks here of multiple personalities , the well-being of the current self is preferred.
• Future consumption is subject to uncertainty. People don't know if they will experience future consumption. There is a certain risk of default, this leads to an interest rate that is intended to compensate for the borrowing of money and justifies the risk premium .
• Every action faces opportunity costs . When actually lending money, resources are foregone and one could generate benefits through other actions. This is to be compensated.
• Apparently people are impatient.

In 2016, a study discussed how time preferences between countries could have developed as a result of agro-climatic conditions. The thesis describes how populations whose ancestors achieved higher crop yields used the rewarding experience of agricultural investments as an opportunity for selection, adaptation and learning processes, which then gradually increased the long-term orientation as a characteristic for this population.

Application in the neoclassical

In neoclassical economic theory one tries to grasp the time preference in the discounted utility model ( DU model for short , German benefit discounting model ). DU models assume that future benefits can be discounted and thus a present value can be calculated. The time preference is usually represented by a single parameter, namely the interest rate. In this model, the individual compares the present value determined in this way with the present benefit and thus makes optimal intertemporal decisions.

Application in agio theory

With the time preference the interest is explained in the agio theory. It is assumed that, as a rule, people appreciate current consumption more than future consumption, and therefore all households tend to want to take out credit. But that is only possible if there are economic agents who are willing to save. In order for a balance to be found between savings and credit volumes, saving must be sufficiently attractive. That is only if the real interest rate is positive. The higher the interest rate, the less attractive it is to take out a loan. Rising interest rates would turn some of the potential borrowers into non-borrowers or even savers; in this way an equilibrium is established.

The Deutsche Bundesbank refutes the statement that loans can only be granted if other economic agents would save. When lending by a commercial or central bank, the sum booked the borrower is recreated - drawn .

History and reception

The British mathematician Frank Plumpton Ramsey described the idea of discounting utility or the concept of time preference as ethically untenable and justified only by a weakness in imagination:

"[...] it is assumed that we do not discount later enjoyments in comparison with ealier ones, a practice which is ethically indefensible and arises merely from the weakness of the imagination;"

- Ramsey, Frank Plumpton. "A mathematical theory of saving." The economic journal (1928): 543-559.

Another justification for discounting future benefits is based on economic growth made possible by technological progress . This would mean that future generations would be “richer” than today's. Accordingly, the marginal utility of the future generation will decrease. In anticipation of economic growth, it therefore seems justified to apply discounting.

On the other hand, there is a fundamental criticism that this form of discounting leads to inadequate measures against climate change and environmental degradation and thus destroys the livelihood of future generations. A generation conflict arises .

Discounting could lead to an overly optimistic paradox: in expectation of growth it is justified to use more resources than without this growth assumption. Therefore, future generations who are believed to be better off may end up being worse off. In addition to economic aspects, the growth expectation should also incorporate ecological or ethical aspects.

See also

• Patience (game theory)
• Social Discount Rate

Individual evidence

1. ↑ Time preference - definition in Gabler Wirtschaftslexikon: Present Preference, Time Preference ; Term for the preference of the present (or present goods, needs) over the future (law of the higher valuation of present needs).
2. ↑ Frederick, Shane, George Loewenstein, and Ted O'donoghue. "Time discounting and time preference: A critical review." Journal of economic literature 40.2 (2002): 351-401. P. 359
3. ^ ^{A b} Hanno Beck : Behavioral Economics: an introduction . Springer Gabler, Wiesbaden 2014. ISBN 978-3-658-03366-8 . Pp. 205-207. and pp. 213-220.
4. ↑ Galor, Oded, and Ömer Özaka. "The agricultural origins of time preference." The American Economic Review 106.10 (2016): 3064-3103.
5. ↑ Agiotheorie - definition in the Gabler Wirtschaftslexikon
6. ↑ Digression - Intertemporal Consumption Decisions - Article at mikrooekonomie.de
7. ↑ Bundesbank brochure: Money and Monetary Policy , 2010, pp. 68ff

literature

• Bernd Hempelmann, Markus Lürwer, Kai Brackschulze: Modeling the time preference for intertemporal decisions in: Wirtschaftswwissenschaftliches Studium, Volume 31, Issue 7, 2002, pp. 381–386.
• Shane Frederick, Georg Loewenstein, Ted O'Donoghue: Time Discounting and Time Preference: A Critical Review . In: Journal of Economic Literature . tape 40 , June 2002, p. 351-401 , doi : 10.1257 / 002205102320161311 ( PDF ).

Web links

• Matthias E. Hummel: Time Preference in Economics - A Critical Assessment. (PDF; 93 kB) In: IANUS work reports, TU Darmstadt. 1999, accessed November 22, 2012 .