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American Economic Review: Vol. 91 No. 1 (March 2001)

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The Personal Discount Rate: Evidence from Military Downsizing Programs

Article Citation

Warner, John T., and Saul Pleeter. 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs." American Economic Review, 91(1): 33-53.

DOI: 10.1257/aer.91.1.33

Abstract

The military drawdown program of the early 1990s provides an opportunity to obtain estimates of personal discount rates based on large numbers of people making real choices involving large sums. The program offered over 65,000 separatees the choice between an annuity and a lump-sum payment. Despite break-even discount rates exceeding 17 percent, most of the separatees selected the lump sum--saving taxpayers $1.7 billion in separation costs. Estimates of discount rates range from 0 to over 30 percent and vary with education, age, race, sex, number of dependents, ability test score, and the size of payment.

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Authors

Warner, John T. (Clemson U)
Pleeter, Saul (US Department of Defense and American U)

JEL Classifications

D91: Intertemporal Consumer Choice; Life Cycle Models and Saving
H56: National Security and War
J26: Retirement; Retirement Policies
J65: Unemployment Insurance; Severance Pay; Plant Closings


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