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Rich versus poor

When asked what is the difference between the rich and the poor it is tempting to reply that the rich have more money. But that is not the only difference. The difference that we want to focus on is that they have a different rate of time preference. This means that the children of the rich are more likely to delay gratification. They are more likely to stay in school. In general, rich individuals are more likely to delay consumption in order to invest.

What determines an individual’s rate of time preference?

We assert that the rate of time preference is determined by the interest rate that one faces. The proof of this assertion is theoretical and we will resist spinning it out unless we see the need.

Is there a policy implication here?

Well, we are not in favor of in-kind subsidies . . . like food stamps . . .  but it might be interesting to find out if interest rate subsidies could influence the rate of time preference and the propensity to delay gratification.

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