Present-Biased Preferences and Money Demand

Participants in the De Nederlandsche Bank Household Survey were asked questions allowing to elicit subjective discount factors over different time horizons. The answers of most participants indicate present-bias as they show a higher annualized nominal rate of return for a 3-month delay than for a 12-month delay. One way to deal with one’s present-bias problem is to impose limits on future spending by holding wealth in non-liquid assets. We therefore predict that agents with more severe present-bias problems hold a lower share of their wealth as money. Our data provide statistically significant evidence in support of this prediction.