Title: Elicitation of elasticity of intertemporal substitution, risk and time preferences
Authors: Jose Olmo - Universidad de Zaragoza (Spain) [presenting]
Gabriel Montes-Rojas - Universidad de Buenos Aires (Argentina)
Antonio Galvao - Michigan State University (United States)
Luciano De Castro - University of Iowa (United States)
Abstract: The elicitation of the elasticity of intertemporal substitution (EIS), discount factor, and risk attitude parameters in dynamic models is of central importance to economics, finance and public policy. An alternative method is suggested to elicit and estimate these three parameters using experimental data jointly. We employ a new model based on dynamic quantile preferences, where individuals maximize the stream of future tau-quantile utilities, for tau in (0, 1). These preferences are simple, dynamically consistent, and monotonic. In the quantile model, the risk attitude is captured by the quantile of the payoff distribution, while the EIS and the discount factor are related to the utility function describing individuals' intertemporal behavior, hence allowing for complete separability between risk, EIS and discount factor. The estimation of the parameters of interest uses a structural maximum likelihood method. Individuals' risk aversion is estimated below the median. The discount factor is marginally smaller than estimates reported in the literature, and the EIS is slightly larger than one, which suggests that utility over time is concave. The estimates for the elasticity contrast with those reported by the existing studies using observational disaggregated data, which in general, find an elasticity smaller than one.