Discounting, Values, and Decisions
AbstractHow 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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Bibliographic InfoArticle 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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Web page: http://www.journals.uchicago.edu/JPE/
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- Bruno Strulovici & Martin Szydlowski, 2012.
"On the Smoothness of Value Functions,"
1542, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Alexandrer Groves, 2013.
"Identifying What is Tempting,"
pgr489, Job Market Papers.
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