Time preference assumptions in normative analyses of household financial decisions

Abstract

Economists conducting normative analyses of household financial decisions typically assume specific values of parameters of the household utility function. We review 12 normative analyses and discuss justifications for the personal discount rates assumed. None of the normative articles cited an independent estimate of the personal discount rate. Instead, the authors made arbitrary assumptions or cited another article’s assumption. We conclude with recommendations for assumptions about the personal discount rate in normative analyses of household financial decisions.

Keywords:

• normative household finance
• optimal saving
• retirement adequacy
• personal finance

JEL Classification:

• D14
• D81
• D91
• G11