A comparison of time preference functional forms: Evidence from a field experiment

A comprehensive understanding of individual-level discounting behaviours is crucial because of its implications for designing financial incentive interventions encouraging health behaviors. This paper estimates mixture models to determine probabilistically the discounting functional form which has the best fit to discounting behaviours, on the basis of a series of incentive-compatible time and risk preference field experiments conducted among 176 civil servants in Belfast, Northern Ireland. Time preference was structurally estimated while controlling for risk preference, background consumption, and probability weighting. The results suggested that future monetary incentives were discounted hyperbolically rather than exponentially and that a generalised hyperbolic form had the best fit among a series of alternative functional forms. Our results also showed that the failure to adopt an appropriate type of functional form led to significantly different discount rates and misleading associations between time preference and real-world behaviours such as smoking. Identifying the best-fit discounting functional form may be a useful tool to improve the effectiveness of financial incentive interventions such that more immediate rewards should be provided to the target population with a higher degree of time-inconsistency.Keywords: Hyperbolic discounting; Time preference; Risk preference; Mixture models; Smoking