Discount Rates in Risk Versus Money and Money Versus Money Tradeoffs

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Abstract:

We use data from a survey of residents of five Italian cities conducted in late spring 2004 to estimate the discount rates implicit in (1) money versus future risk reductions and (2) money versus money tradeoffs. We find that the mean personal discount rate is 0.3–1.7% in (1) and 8.7% in (2). The latter is lower than the discount rates estimated in comparable situations in many recent studies, greater than market interest rates in Italy at the time, and exhibits modest variation with age and gender. The discount rate implicit in money versus risk tradeoffs is within the range of estimates from studies in the United States and Europe, and does not depend on observable individual characteristics. We use split samples to investigate whether a completely abstract risk reduction—one where the risk reduction delivery has been stripped of all specifics, so that respondents should focus on the risks without being distracted by details—results in WTP and discount figures comparable to those from an identified delivery mechanism (a medical test). We find that while WTP for an immediate risk reduction is 42–73% higher with the abstract risk reduction, the discount rate in the money versus risk tradeoffs and the variance of the error term in the WTP equation are the same across the two variants of the questionnaire.

Keywords: Individual discount rates; latent risk reductions; stated preference questions; value of a statistical life

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1539-6924.2007.00899.x

Affiliations: Fondazione Eni Enrico Mattei, Venice.

Publication date: April 1, 2007

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