Lifecycle Changes in the Rate of Time Preference: Testing the Theory of Endogenous Preferences and its Relevance to Adolescent Substance Abuse

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Title: Lifecycle Changes in the Rate of Time Preference: Testing the Theory of Endogenous Preferences and its Relevance to Adolescent Substance Abuse
Author: Bishai, David
Abstract: Economic theory indicates that because one's activities to improve health reward one in the future, persons who value the future more highly will be more prone to healthy activity. Without measures of time preference we can neither test this theory nor understand what makes people value future events more highly. Progress in this area requires a method to infer measures of time preference from the secondary datasets used in public health and economic research. Time preference in its econometric expression is the measurable forfeiting of additional goods in the present to enjoy goods in the future. The rate of time preference varies from 0 for individuals who are indifferent between present and future consumption to infinity for individuals who have place no value on future consumption. When subjects decide to forego higher wages in the present by taking safer jobs that increase their chance of future survival they send signals about their time preference (mixed with signals about risk aversion, other job prospects, family pressures, etc.). These wage-risk tradeoffs offer scholars interested in measuring time preference the convenience of a secondary dataset, but the drawback of needing to control for the confounding and endogenous factors. This study applies econometric techniques to the National Longitudinal Survey of Youth (NLSY) to derive estimates of the levels of time preference for each labor force participant in each of 15 waves of data from 1979 to 1994. With these estimates I describe the evolution of time preference over the life course. I test the following hypotheses suggested by Becker and Mulligan (Becker and Mulligan 1997)in their theory of endogenous time preferences: 1)Age and Education reduce the rate of time preference; 2)Female gender and Father's Presence in the Home at age 14 reduce the rate of time preference; 3) Religious participation reduces the rate of time preference. Finally I show that subjects with a more immediate time preference are more likely to drink alcohol and conditional upon drinking are more more likely to drink heavily. A policy maker with a better understanding of the determinants of time preference can design better policies that empower children to value their future well-being and thereby increase present healthy behavior.
Date: 1999-10-09
Series: Hopkins Population Center Papers on Population

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