Income Differentials & Rate of Time Preference: A Developing Country Perspective

Estimating time preferences in developing countries like India, is essential for designing public policies that influence savings and investment decisions. However, limited data availability and various economic constraints restrict the estimation process and its analysis. Following Lawrance (1991) framework, this paper adopts Euler equation approach to estimate individual time preferences and assess its relation with one’s income level, in the context of India. Using a national level household survey, the CMIE CPHS dataset spanning 2014-2019, the average RTP for the Indian population is estimated to be 0.0689. It means that on average, individuals in India are willing to forgo 6.89% of future consumption to have the same amount of consumption today. Furthermore, the results show that wealthier individuals are marginally more patient than poorer ones, exhibiting decreasing marginal impatience. These findings have significant policy implications for shaping redistributive, welfare, and growth policies in India.