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Discounting, Values, and Decisions

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  • John K.-H. Quah
  • Bruno Strulovici

Abstract

How do discount rates affect agents’ decisions and valuations? This paper provides a general method to analyze this question, allowing stochastic and managed cash flows, stochastic discount rates, and time inconsistency and including arbitrary learning and payoff or utility processes. We show that some of these features can lead to counterintuitive answers (e.g., “a more patient agent stops earlier”), but we also establish, under simple conditions, theorems yielding robust predictions concerning the impact of discount rates on control and stopping decisions and on valuations. We apply our theory to models of search, experimentation, bankruptcy, optimal growth, investment, and social learning.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/673867
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File URL: http://www.jstor.org/stable/full/10.1086/673867
Download Restriction: Access to the online full text or PDF requires a subscription.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 121 (2013)
Issue (Month): 5 ()
Pages: 896 - 939

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Handle: RePEc:ucp:jpolec:doi:10.1086/673867

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Web page: http://www.journals.uchicago.edu/JPE/

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Cited by:
  1. Strulovici, Bruno & Szydlowski, Martin, 2012. "On the Smoothness of Value Functions," MPRA Paper 36326, University Library of Munich, Germany, revised 31 Jan 2012.
  2. Alexandrer Groves, 2013. "Identifying What is Tempting," 2013 Papers pgr489, Job Market Papers.

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