Preprint by Cavatorta E and Groom B (2025)
Abstract: This paper studies what happens to intertemporal discounting when expected utility maximizing subjects doubt the credibility of future payments and internalize this uncertainty. We develop a theory to show how hyperbolic-type discounting behaviour arises when the arrival of future payments is doubted, even if the true time preferences are exponential. The theoretical predictions are confirmed in data from a lab study in which a ‘credibility risk’ is explicitly introduced. 50% of respondents respond this way to non-credible payments and nearly 60% of them are misclassified as non-exponential discounters. This paper shows that studies that do not ensure credibility in future payments may erroneously conclude that subjects’ behaviour is driven by non-exponential pure time preferences rather than the rational response to perceived doubts about the arrival of the future payments. These findings have implications for policies advocating contracts tailored to individual time preferences.
