time preference

  

Definition

Inclination of a consumer towards current consumption (expenditure) over future consumption, or vice versa. What may induce a consumer to delay consumption is called Rate of Time Preference amount of money (expressed as a proportion of the consumer's current income) that will compensate him or her for forgoing current consumption. This rate corresponds with the market interest rate and depends (among other factors) on the consumer's expectations of the future income. If the future income is expected to be higher than the consumer's current income, he or she will have a high rate of time preference; thus, the interest rate has to be high enough to induce savings instead of spending. Similarly, if the future income is expected to be less than the current income, a rational consumer will be inclined to save even if the interest rate is low. Also, the consumer's rate of time preference (hence the interest rate demanded) is likely to rise as the amount of his or her savings rises. Therefore, the consumer will limit his or her savings to the amount at which the rate of time preference equals the rate of interest. This concept forms the basis of the theory of interest proposed by the Austrian economist Eugen von Bohem-Bawerk (1851-1914).

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