Academic journal article Economic Inquiry

Heterogeneous Rates of Time Preference and the Decision to Smoke

Academic journal article Economic Inquiry

Heterogeneous Rates of Time Preference and the Decision to Smoke

Article excerpt

I. INTRODUCTION

Smoking imposes substantial health risks, many of which are not immediate and will also have long-term effects on smokers' well-being. Recent estimates of the lost life expectancy due to smoking are 2.4 years for women and 4.4 years for men, with some studies indicating even more substantial losses. (1) Given the latency period before many of the most severe smoking risks are manifested, people with greater individual rates of time preference will be less influenced by the discounted value of the health losses and will be more likely to be smokers. This paper examines whether this relationship between rates of time preference and smoking behavior is in fact borne out by developing empirical estimates of how smokers and nonsmokers discount years of life lost due to the fatality risks that they incur on the job.

A variety of researchers have theorized that individuals with higher rates of time preference will be more likely to engage in risky behaviors such as smoking. In some instances, these theories have utilized rational models of individual choice. (2) Fuchs (1986) views underlying differences in individual rates of time preference as governing choices of education and smoking, whereas Becker and Mulligan (1997) consider education and discount rates to be endogenous. Other models have hypothesized that smokers are guilty of intertemporal irrationality, possibly in the form of hyperbolic discounting. (3) Indeed, the theoretical linkage between smoking and rates of time preference is sufficiently convincing that some have argued for the use of smoking status as a proxy for a high discount rate. (4)

Studies to date have found mixed evidence of such a relationship. The experimental evidence in Chesson and Viscusi (2000) yielded an unexpected negative relationship between smoking and rates of time preference, but the stated preference study by Baker et al. (2003) found that smokers had higher rates of time preference than did never smokers. Khwaja et al. (2007) hypothesize based on their analysis of survey data that it is not the differences in rates of time preference per se that influence smoking decisions but rather temporal myopia. If rates of time preference exert a common influence on risky behaviors, then smokers should be more likely to incur other health risks. Consistent with this view, Hersch and Viscusi (1998) found that smokers choose riskier jobs, are less likely to floss their teeth, are less likely to check their blood pressure, and have home accident rates double the level for nonsmokers. Cutler and Glaeser (2005) focused on a different mix of health-related behaviors--smoking, heavy drinking, obesity, and mammograms for women--and found correlations in the expected direction, but they concluded that the simple pairwise correlations were surprisingly weak, explaining under 20% of the variation.

Our approach here is quite different. By examining fatality risk-wage decisions in the labor market, it is possible to estimate the implicit rates of time preference that smokers and nonsmokers have with respect to years of life. (5) If people make consistent intertemporal risk choices for occupational fatality risks and smoking risks, then one would expect smokers to exhibit higher rates of time preference with respect to years of life in their labor market decisions as well. Consistent with the theoretical frameworks, we find that smokers have significantly higher rates of time preference than do their nonsmoking counterparts.

The labor market data permit estimation of average rates of time preference rather than the structure of discount rates over time. Thus, it is not feasible to examine whether individual rates of time preference decline over time, which is a central concern of models of hyperbolic discounting and time inconsistency. The most common hyperbolic discounting model hypothesizes that discount rates are high in the first period but decline to a constant, lower discount rate thereafter. …

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