Time Discounting, Savings Behavior, and Wealth Inequality

Abstract

The distribution of wealth in society is very unequal and has important economic and political consequences. According to standard life-cycle savings theory, differences in time discounting behavior across individuals can play an important role for their position in the wealth distribution. Empirical testing of this hypothesis has been difficult because of serious data limitations. We overcome these limitations by linking an experimental measure of time discounting for a large sample of middle-aged individuals to Danish high-quality administrative data with information about their real-life wealth over the life-cycle as well as a large number of background characteristics. The results show that individuals with relatively low time discounting are persistently positioned higher in the wealth distribution. The relationship is of the same magnitude as the association between years of education and the position in the wealth distribution, and it robustly persists after controlling for a large number of theoretically motivated confounders such as education, risk aversion, school grades, income, credit constraints, initial wealth, and parental wealth. These findings support the view that individual differences in time discounting affect individuals’ positions in the wealth distribution through the savings channel.

Manuscript, R&R