Looking for Evidence of Time-Inconsistent Preferences in Asset Market Data

Abstract

This study argues that strong evidence contradicting the traditional assumption of time-consistent preferences is not available. The study builds and analyzes the implications of a deterministic general equilibrium model and compares them to data from the U.S. asset market. The model implies that (1) because of dynamic arbitrage, the prices of retradable assets cannot reveal whether pref-erences are time-inconsistent; but (2) the prices of commitment assets, invest-ments which must be held for their lifetime, can. These prices will be higher than the present values of their future payoffs only when preferences are time-inconsistent. And (3) when preferences are time-inconsistent, people will not hold both retradable and commitment assets. Empirical observations on two ex-amples of commitment assets—education and individual retirement accounts— are not consistent with these model implications.