On the problem of measuring discount rates in intertemporal transportation choices

Abstract

Users of transportation systems face economic decisions that involve cash flows in different points in time. In making these intertemporal choices, users tradeoff between immediate and future benefits and costs. For example, battery electric vehicles require a higher investment but offer important energy savings that may pay off. Using an appropriate discount rate, future costs are transformed into a present equivalent that can be directly compared with upfront expenses or known prices. In this paper we review different methods for measuring individual discount rates that have been used in the literature to discuss, in particular, the findings of the “energy paradox” or undervaluation of future savings (making more difficult the adoption of energy efficient vehicles). We identify two main methods of treating discount rates in discrete choice models, namely endogenous and exogenous discounting. Exogenous discounting addresses some problems of the endogenous discounting method (attribute correlation, endogeneity, and imposition of rational evaluation of future costs), but lacks correct treatment of unobserved heterogeneity. We also review experimental elicitation of intertemporal preferences that accounts for heterogeneous discounting. In particular, we tested a modified version of a reward-over-time choice experiment that can be easily incorporated into transportation surveys. In addition, we compared the experimental discount rates with those obtained from a contingent valuation exercise. The continent valuation exercise not only provided a much higher mean for the discount rate (13.93 % was the mean experimental discount rate, whereas the contingent valuation mean was 93.9 %), but also the level of variability among respondents was unexpectedly high (6.4–267 %).