Time Preference

An individual's preference for consumption now rather than consumption later. It is measured by the marginal intertemporal rate of substitution: the minimum future sum required to compensate an individual for forgoing consumption now. Thus, if the time preference rate is 3 per cent per annum, the individual will be indifferent between $1.03 next year and $1.00 today. It is also the slope of an indifference curve where the horizontal axis shows consumption today and the vertical axis shows consumption at a future date. As the name implies, the usual presumption is that the rate of time preference will be positive. The distinction between marginal and average time preference rates ought to be borne in mind. The average rate relates to a total bundle of goods and services consumed now or in the future. The marginal rate relates to a small incremental bundle. Quite why future consumption (setting aside all considerations of uncertainty) should be considered less valuable to individuals than the same level of current consumption has never been satisfactorily explained (at least, not by economists), though it seems plausible to accept that people with large current consumption and small and uncertain future consumption may have a negative rate of time preference. See Discounting.

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