Studies on Intertemporal Preferences with Applications to Health Economics

Abstract

Economic benefits are often received at different points in time. There are \nnumerous examples of economic applications where the outcomes occur at \nmultiple points in time. Among these are the savings decisions of households, the \nenvironmental policies of countries, investment decisions of firms, health-related \ndecisions of individuals, and educational activities of students. \nIn the majority of these cases, future outcomes are valued lower than similar \npresent outcomes, i.e. there is positive time preference. There are several reasons \nfor this behavior. One reason is that the future is almost always surrounded by \nuncertainty, whilst outcomes received immediately or in the nearer future are \nmore certain. This translates into the discounting of future outcomes. \nSecond, utility is often concave in outcomes (diminishing marginal utility). \nThis means that more units of a particular outcome give less additional utility the \nmore one already possesses of that outcome or the more one has already \nconsumed of it. A second cup of coffee, for example, often gives less utility than \nthe first one. Because wealth is increasing over time due to economic growth, \npeople have more possibilities to consume in the future than in the present. The \nutility of this extra consumption does, however, not increase proportionally with \nthe increase of consumption, so that future outcomes give less utility than similar \npresent outcomes.

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