Estimation of the Personal Discount Rate: Evidence from Military Reenlistment Decisions
Abstract
This paper presents some estimates of the personal discount rate of Navy enlisted personnel. Prior to April 1979, the reenlistment bonus was paid in annual installments at the beginning of each year of reenlistment. In fiscal year 1979 (FY79), the Department of Defense requested sufficient funds to begin making lump sum payments and, starting on 1 April 1979, the entire bonus has been paid as a lump-sum at the date of reenlistment. By comparing the effects of bonuses before and after the policy change, we estimated the differential impact of lump-sum and installment bonuses. We then use these estimates to compute the implied discount rate. We find that Navy enlisted personnel have a real discount rate of about 17 percent. Although payment of lump-sum bonuses increases the incentive to reenlist it also decreases the incentive to complete the reenlistment contract, thus leading to higher costs of contract enforcement and collection of unfulfilled obligations. Recognizing the difficulties in recoupment of lump-sum bonuses, Congress decided to partially return to the payment of bonuses in installments.
Document Details
- Document Type
- Technical Report
- Publication Date
- Apr 01, 1982
- Accession Number
- ADA122419
Entities
People
- Lee Mairs
- Mathew S. Goldberg
- Paul Hogan
- Steven Cylke
Organizations
- Center for Naval Analyses