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Explaining the fixed cost component of discounting: the importance of students' liquidity constraints

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  • Andrew G. Meyer

    (Marquette University)

Abstract

Utilizing experimental data on choices over real monetary rewards made by university students, we provide evidence that two measures of liquidity, income and employment status, significantly explain differences in patterns of discounting. We find an average fixed cost component of discounting in the range of $5 for unemployed students and near $0 for employed students. An increase in annual disposable income of $1000 decreases the fixed cost component of discounting by approximately $0.20 to $0.25. These findings can help resolve the puzzle that some studies in the literature find evidence of present-bias and magnitude effects and some do not.

Suggested Citation

  • Andrew G. Meyer, 2016. "Explaining the fixed cost component of discounting: the importance of students' liquidity constraints," Economics Bulletin, AccessEcon, vol. 36(1), pages 355-364.
    • Handle: RePEc:ebl:ecbull:eb-15-00721
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    References listed on IDEAS

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    Cited by:

    1. Sergio Da Silva & Dinorá De Faveri & Ana Correa & Raul Matsushita, 2017. "High-income consumers may be less hyperbolic when discounting the future," Economics Bulletin, AccessEcon, vol. 37(3), pages 1421-1434.

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    More about this item

    Keywords

    discounting; experiments; time preferences; present bias;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments

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