Measuring Time Preference and the Elasticity of Intertemporal Substitution Miles S. Kimball, Claudia R. Sahm and Matthew D. Shapiro September 6, 2006 Internet Project Meeting Behavioral Model log c s(r ) • c is consumption, • r is the real interest rate, • s is the elasticity of intertemporal substitution, and • ρ is the subjective discount rate Research Design • s, ρ : Preference parameters • r : Treatment • c : Behavioral response Research Strategy Vary treatment and use responses to infer parameters. Implementation • Vary Interest Rate – Vary cost of current consumption – Vary length of time periods • Measure Consumption Choice – Choose among small set of paths – Actively form a desired path • Infer Preferences – Summary statistics of responses – Statistical model with response error Previous Survey Measures • HRS 1992 Module K, N = 198 – Analyzed by Barsky, Kimball, Juster, and Shapiro (QJE 1997) • HRS 1999 Mailout, N = 1,210 – Similar content to part of Internet Survey Questions explicitly vary the cost of current consumption and offer a discrete choice over a small set of consumption paths MS Internet Survey Wave 2 (Fall 2004) Use graphics on internet to test other measures: • Version 1, N = 350 – Vary cost of consumption – Choose from set of pairs • Version 2, N = 155 – Vary cost of consumption – Move bars to create pair • Version 3, N = 183 – Vary length of period – Move bars to create pair Series Introduction - Version 1 - • Series includes four questions with varying interest rates Introduction – 0% Interest Rate • Sequence r = {0%, 4.6%, 9.2%, 13.8%} is random • Introduction repeated for each interest rate Patterns – 0% Interest Rate • Asked to choose two patterns • Above screen (1 of 6) is identical to HRS Mail Out Expansion Screen • Follow-up if first choice on boundary (A or E) • New feature on Internet Randomize Pair C • Choice of ($3000, $3000) moves from B to C to D • 3 values to the parameter • New feature on internet • Top screen on mail out Randomize Left-to-Right • Screens mirror image • New feature on internet • Top screen on mail out Randomize Shifts with Interest Rate • Example with r = 9.2% • Choice of ($2750, $3900) moves from E to C to A • 3 values to the parameter • New feature on internet • Middle screen on mail out Summary of Innovations in Internet Question Series • 18 different screen groups • 6 different sequences of interest rates • 11 discrete choices per question Purpose of Innovations • Encourage active choices • Increase informative responses • Isolate framing effects Response Statistics Internet Mail Any Responders Complete Sequence % 100.0 82.2 N 366 301 % 100.0 88.2 N 930 820 Complete Responders Second Choice Pairs All Extreme Pairs 100.0 77.1 2.0 301 232 6 100.0 90.6 17.2 820 743 141 • Internet lower completion rate • Internet fewer second choices • Internet fewer non-informative responses Consumption Growth at 0% Interest Rate 45 40 35 Percent 30 25 20 15 10 5 Consumption Growth at 0% Interest Rate Internet Mail • Constant consumption is modal choice 13.9 11.6 9.2 6.9 4.6 2.3 0.0 -2.3 -4.6 -6.9 -9.2 -11.6 -13.9 0 Change in Consumption Growth as Interest Rate to 13.8% from 0% 60 50 Internet % Increase Growth 48.5 % Decrease Growth 25.9 Percent 40 Mail 26.5 17.2 30 20 10 23.1 20.8 18.5 16.2 13.9 11.6 9.2 6.9 4.6 2.3 0.0 -2.3 -4.6 -6.9 -9.2 -11.6 -13.9 -16.2 -18.5 -20.8 -23.1 0 Growth at r = 13.8% Minus Growth at r = 0% Internet Mail • Interest rates change consumption more on internet Change in Consumption Growth as Interest Rate Increases - Internet 45 40 35 % Increase Growth % Decrease Growth Percent 30 4.9% 34.2 22.9 13.8% 48.5 25.9 25 20 15 10 5 23.1 20.8 18.5 16.2 13.9 11.6 9.2 6.9 4.6 2.3 0.0 -2.3 -4.6 -6.9 -9.2 -11.6 -13.9 -16.2 -18.5 -20.8 -23.1 0 Consumption Growth - Growth at 0% Interest Rate r = 4.6% r = 13.8% • Decrease in growth is a sign of survey response error Estimates of Parameters Average in Sample sρ: Growth at r = 0% s: IES by Interest Rate 0% to 4.6% 4.6% to 9.2% 9.2% to 13.8% Internet 0.13% Mail 1.3% 0.13 0.14 0.05 0.004 0.01 0.04 • Responses reveal low time preference and IES • Median and modal values in both surveys equal 0 More Graphical Questions - Version 2 - • Move bars to select a consumption path More Graphical Questions - Version 3 - • Vary length of current and future periods Implementation Issues Internet expands preference measures, but • Graphics require more programming – More programming → more bugs – Coordinate programmer and analyst • Internet captures more data: number of clicks and interim responses Extensions / Renewal • Refine and analyze data on IES, time preference, and risk tolerance – Improve instrument and output delivery – Estimate statistical model • Measure complementary parameters – Diminishing marginal utility – Labor supply elasticities – Retirement elasticity