We design experiments to jointly elicit risk and time preferences for the adult Danish population. Since subjects are generally risk averse, we find that joint elicitation provides estimates of discount rates that are significantly lower than those found in previous studies and more in line with what would be considered as a priori reasonable rates. The statistical specification relies on a theoretical framework that involves a latent trade-off between long-run optimization and short-run temptation. Estimation of this specification is undertaken using structural, maximum likelihood methods. Our main results based on exponential discounting are robust to alternative specifications such as hyperbolic discounting. These results have direct implications for attempts to elicit time preferences, as well as debates over the appropriate domain of the utility function when characterizing risk aversion and time consistency.

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Eliciting risk and time preferences.

Most economic models are based on the self-interest hypothesis that assumes that material self-interest exclusively motivates all people. Experimental economists have gathered overwhelming evidence in recent years, however, that systematically refutes the self-interest hypothesis, suggesting that concerns for altruism, fairness, and reciprocity strongly motivate many people. Moreover, several theoretical papers demonstrate that the observed phenomena can be explained in a rigorous and tractable manner. These theories then induced a first wave of experimental research which offered exciting insights into both the nature of preferences and the relative performance of competing fairness theories. The purpose of this chapter is to review these developments, to point out open questions, and to suggest avenues for future research. We also discuss recent neuroeconomic evidence that is consistent with the view that many people have a taste for mutual cooperation and the punishment of norm violators. We further illustrate the powerful impact of fairness concerns on cooperation, competition, incentives, and contract design.

https://www.et.econ.uni-muenchen.de/personen/professor/schmidt/publikationen/papers/reciprocalt.pdf

The Economics of Fairness, Reciprocity and Altruism--Experimental Evidence and New Theories.

Economists ubiquitously employ a simple and elegant explanation for risk aversion: It derives from the concavity of the utility-of-wealth function within the expected-utility framework. We show that this explanation is not plausible in most applications, since anything more than economically negligible risk aversion over moderate stakes requires a utility-of-wealth function that is so concave that it predicts absurdly severe risk aversion over very large stakes. We present examples of how the expected-utility framework has misled economists, and why we believe a better explanation for risk aversion must incorporate loss aversion and mental accounting.

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Anomalies: Risk Aversion

Foreword Valerie Braithwaite Preface 1. Introduction 2. Tax law, the shadow economy and tax non-compliance 3. Social representations of taxes 4. Tax compliance decisions 5. Self-employment and taxpaying 6. Interaction between tax authorities and taxpayers 7. Cautious conclusions.

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The Economic Psychology of Tax Behaviour

Experimentally elicited discount rates are frequently higher than what seems reasonable for economic decision-making. Such high rates are often attributed to present-biased discounting. A well-known bias of standard measurements is the assumption of linear consumption utility. Attempting to correct this bias using measures of risk aversion to identify concavity, researchers find reasonable discounting but at the cost of exceptionally high utility function curvature. We present a new methodology for identifying time preferences, both discounting and curvature, from simple allocation decisions. We find reasonable levels of both discounting and curvature and, surprisingly, dynamically consistent time preferences. (JEL C91, D12, D81) Understanding and estimating time preferences is obviously of great importance to economists, marketers, and policy makers. Consumers decide how much to invest in savings, education, real estate, and life insurance, how much to diet, exercise, and smoke, whether to marry, when to have children, and what to leave in their wills. While there has been substantial research estimating time preferences using aggregate consumption data, 1 the bulk of the effort has occurred in laboratory environments. 2 Among the many laboratory techniques employed, recent studies have favored multiple price lists (MPL) with monetary payments. 3 With MPLs, individuals are asked multiple times to choose between smaller payment amounts closer to the present and larger amounts further into the future. The interest rate increases monotonically in a price list, such that the point where an individual switches from preferring sooner payments to later payments carries interval

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Estimating Time Preferences from Convex Budgets

Experimental studies of risk and time preference typically focus on one of the two phenomena. The goal of this paper is to investigate the (possible) correlation between subjects’ attitude to risk and their time preference. For this sake we ask 61 subjects to price a simple lottery in three different scenarios. At the first, the lottery premium is paid ‘now’. At the second, it is paid ‘later’. At the third, it is paid ‘even later‘. By comparing the certainty equivalents offered by the subjects for the three lotteries, we test how time and risk preferences are interrelated. Since the time interval between ‘now’ and ‘later’ is the same as between ‘later’ and ‘even later’, we also test the hypothesis of hyperbolic discounting. The main result is a statistically significant negative correlation between subjects’ degrees of risk aversion and their (implicit) discount factors. Moreover, we show that the negative correlation is independent of the method used to elicit certainty equivalents (willingness to pay versus willingness to accept).

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On the Interaction of Risk and Time Preferences: An Experimental Study

In the trust game first player 1 decides between non-cooperation or trust in reciprocity. Only in the latter case player 2 chooses between exploiting or rewarding player 1. In our computerized experiment, player 2 can be always rewarding (implemented as a robot strategy) or decide opportunistically. To allow for reputation formation, this base game is played repeatedly. Learning can be analyzed since participants play successively several repeated games with changing partners. Participants can explicitly rely on mixed strategies which allows testing the qualitative and quantitative aspects of reputation equilibria also at an individual level.

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An experimental study of the repeated trust game with incomplete information

We study behavior within a simple principal--agent experiment. Our design allows for a large class of linear contracts. Principals can offer any feasible combination of (negative) fixed wages and incentives in the form of return sharing. This great contractual flexibility allows us to study incentive compatibility simultaneously with issues of `fair sharing' and reciprocity, which were previously found to be important. We find a high degree of incentive-compatible behavior, but also `fair sharing' and reciprocity. In contrast to other incentive devices studied in the literature, the incentives are `reciprocity-compatible'. Principals recognize the agency problem and react accordingly.

Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment

The paper investigates whether Internet experiments are an appropriate alternative to traditional laboratory experiments. For an economic experiment of individual decision making results obtained over the Internet are compared to results obtained in the laboratory using exactly the same software. Of particular interest are differences in individual behavior. Our main findings are: (1) running our own experiment on the Internet and in the laboratory generated similar data when economic decision behavior is concerned. (2) Variance in economic decision behavior is generally higher on the Internet experiment. (3) Decision times are shorter on the Internet. (4) Internet software provides a helpful platform for implementing economic experiments. The paper also reports on design challenges and how we have solved them.

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Design and Evaluation of an Economic Experiment via the Internet

In our tax evasion experiment each participant earns his income by solving intertemporal allocation tasks. The resulting income has to be declared in a tax return which is randomly verified. If tax evasion is detected, the subject is punished by a fixed penalty capturing the fact that (in Germany) tax fraud is a crime. The experiment consists of four tax periods, the final two involving an increased tax rate. Taxes are donated to charity organizations, chosen by subjects. According to our results higher income levels encourage tax evasion, surprisingly an increased tax rate does not.

Vital Anderhub

Papers

On the Interaction of Risk and Time Preferences: An Experimental Study

An experimental study of the repeated trust game with incomplete information

Efficient Contracting and Fair Play in a Simple Principal-Agent Experiment

Design and Evaluation of an Economic Experiment via the Internet

Tax Evasion with Earned Income - An Experimental Study