Credit Constraints and the Measurement of Time Preferences∗

Incentivized experiments are commonly used to estimate marginal rates of intertemporal substitution (MRS) in the lab and in the field in order to make inferences about individual time preferences. This paper considers an integrated model of behavior in which individuals are subject to financial shocks and credit constraints, and take those into account when making experimental choices. The model shows that measured MRS depends on the individual’s effective interest rate which is equal to the relative marginal utility of current and future consumption. Experimental responses should therefore be correlated with other variables that describe the subject’s financial situation, like savings and shocks to income and consumption. We test the model using a new a panel data set from Mali and find evidence for such effects. Our results imply that the relationship between experimentally elicited MRS and time preferences is not straightforward. However, measured MRS can be useful in determining the importance of different types of financial shocks to the household. JEL: D90, D03, D14, C90, C81, B41 ∗Word Count: 14327. We would like to thank David Atkin, Ken Chay, Andrew Foster, Yoram Halevy, Kyle Hyndman, Supreet Kaur, Dilip Mokherjee, Sriniketh Nagavarapu, Nancy Qian, David Weil and seminar participants at Boston University, Brown University, Columbia University, and Yale University for their comments and suggestions. All errors are ours. We recognize support from the Aga Khan Foundation, the Economic and Social Research Council (Development Frontiers Grant ES/K01207X/1), the Brown University Seed Fund award, and the Population Studies and Training Center at Brown University in the completion of this project. †Department of Economics, Brown University: [email protected] ‡Corresponding author: Department of Economics, Brown University Box B Providence, Rhode Island 02912 USA. Tel +1 401 863 6972. Fax +1 401 863 1970. Email [email protected]