Present-Biased Preferences and Money Demand

Participants in the De Nederlandsche Bank Household Survey (DHS) were asked for how much they would require as to accept a delay in receiving a financial reward. The answers of most participants indicate present-bias as they require a higher annualized nominal rate of return for a three month delay than for a twelve 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.