Determinants of Time and Risk Preference and its Implications for Dynamic Social Discount Rate

Abstract

This thesis focuses on the measurement of the social discount rate (SDR) and its policy implications. The Ramsey Rule provides the starting point for this study. Following an overview of the study in Chapter 1, where its importance and necessity in micro-economic appraisal and macro-economic management are addressed, Chapter 2 provides a comprehensive literature review about the components of SDR, focusing on time preference and risk preference. Many previous studies are shown to provide this study with theoretical supports, methodologies and empirical evidence to interrogate and develop. The third chapter uses a reverse Ramsey rule to test how natural disasters affect time preference in different countries. It finds that natural disasters have a significant influence on time preference, especially the numbers of deaths associated with natural disasters. In addition, heterogeneity among countries is also important in time preference determination. The fourth chapter initiates a survey in major cities in China to nd out the determinants of time preference among the urban population. It indicates that individual heterogeneity, such as age, education and other personal factors, explains differences of time preference in individual level, which is essential for policy makers to understand the formation and change of time preference in individual level. Also, a high time preference among citizens in Chinese cities is revealed. The fifth chapter focuses on risk preference and use a modified method to extract the elasticity of intertemporal substitution (EIS) existing in different states of the US and looks to identify its determinants. Different EISs are found in different states, indicating different risk preferences among them. Heterogeneity in demographic, economic and other characteristics are found to explain this variation. The sixth chapter utilise the findings of the preceding chapters to generate estimates of time-dependent trends in SDR that incorporate the different effects of time preferences and risk preferences and provides some policy implications, suggesting that time-inconsistent time and risk preferences should be adopted for a dynamic social discount rate (DSDR) in a more accurate and precise project valuation. A SDR with a higher base and a faster decline over time should be employed. This study adds to the literatures relating to the measurement of SDR and provides practical advice for policy makers. A more inclusive and comprehensive study is looked forward in the future, which should include more countries in more time periods. This broader inclusion of data will help nd more universal and significant determinants of time and risk preference, providing policy makers more information on SDR recommendation.

Date of Award	17 Jan 2022
Original language	English
Awarding Institution	University of Bath
Supervisor	Alistair Hunt (Supervisor) & Bruce Morley (Supervisor)