What is the Time Preference Theory of Interest?

The Time Preference Theory of Interest is also known as The Agio Theory of Interest. It was presented by Bohm Bawerk, who said that interest is an agio (reward) or (premium) for time preference. People prefer present income, present consumption and present satisfaction of wants, which means that people are impatient to spend. To induce them to postpone their consumption, they are to be compensated by paying interest. Irving Fisher said, “The rate of time preference measures the rate of interest.” The higher the time preference, the higher the impatience to spend. According to Fisher, people with low level of income, uncertain about their future and are spendthrifts will demand high rate of interest whereas their opposites will demand low amount of interest.