ABSTRACT

Time preference is a concept originally introduced by Rae (1834) in his study on differences of wealth among nations. According to Rae, time preference is determined by four different factors, which may positively or negatively affect the desire of accumulation: the bequest motive, the propensity to self-restraints, uncertainty of human life and the gratification derived from immediate consumption. Time preference is also described as an intertemporal allocation of consumption by Fisher (1930), who enriched Rae’s view with two additional personal factors: foresight and fashion. All these factors were later integrated into the discount rate of the discounted utility (DU) model (Samuelson 1937). The DU model is based on various assumptions including stationary instantaneous utility, independence of discounting from consumption, diminishing marginal utility, positive time preference and, in particular, constant discounting, which implies time-consistent preferences. Time consistency means that later preferences are in line with earlier preferences – namely, preferences are constant across time. Individual time preferences are time-consistent if ‘for any two consumption profiles (c t , …, c T ) and (c′ t , …, c′ T ), with c t = c′ t , Ut (ct ,c t + 1, …, cT ) ≥ Ut (c′ t ,c′ t + 1, …, c′ T ) if and only if U t + 1(ct ,ct + 1, …, cT ) ≥ U t + 1(c′ t ,c′ t + 1, …, c′ T )’ (Frederick et al. 2002: 358).