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Discount rate is rate at which actors will value something that occurs in the future at less than its value now.

A simple hypothetical test that would determine this would be:

  • 'Would you rather have \$100 now, or \$100 in one year?'
  • 'Would you rather have \$100 now, or \$150 in one year?'
  • 'Would you rather have \$100 now, or \$200 in one year?'

And so forth, to determine just how much someone values money now, over money in the future.

Discount rates can explain why criminals for example, commit seemingly irrational crimes - the cost of potential imprisonment being discounted because it's an abstract outcome that occurs in the future, compared to an immediate gain now.

My question is - is there research into what factors affect and individual's discount rate?

Eg. things like age, education, income.

And in what circumstances was the discount rate being measured?

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  • $\begingroup$ Hint : Try to look at experimental studies. This kind of questions are handled in lab studies. $\endgroup$ – optimal control Oct 13 '16 at 10:39
  • $\begingroup$ This is a pretty large field. Can you narrow it down a lot? $\endgroup$ – 410 gone Oct 14 '16 at 6:31
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I think one can answer this question by looking at what affects saving rates.

Age

According to the life-cycle model of household savings*, young and old people save less than middle-aged people. Young people who are starting a new family have many expenses and a lower income due to lack of work experience. Thus, young people save less and value money more in the present (a high reservation intertemporal discount rate). Middle-aged people have a higher income and save towards their retirement (a low reservation intertemporal discount rate). Old-aged people retire and live off their savings, so they have a high reservation intertemporal discount rate.

Dependants

If you support more dependants, you will be shorter of money and will have a high reservation intertemporal discount rate.

Investment Opportunities

Better quality investments and financial institutions will improve the interest rate at which money can be saved, which increases the intertemporal discount rate at the intersection of the budget constraint line and the indifference curve of the individual.

Income

One would think that saving increases with income, but high-income countries actually save less than middle-income countries, but moreso than low-income countries (World Bank, data on Gross Domestic Savings (% of GDP)). So there is no obvious relationship with the level of income, but if the anticipated future level of income goes up, then people will save less (and consume more in the present) giving a higher intertemporal discount rate.

*Alberto Aldo and Franco Modigliani, "The Life-Cycle Hypothesis of Saving: Aggregate Implications and Tests," American Economic Review 53, no. 1, (March 1963), 55-84.

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