On Depth and Retrospect: “I Forget, and Forgive – but I Discount”
AbstractThe discounting of future felicity flows transposes to the intertemporal optimization context the assumption of interest-bearing wealth or savings. The validity of the hypothesis has been challenged by several empirical (ir)regularities and by the theoretical implications for human decision processing. In particular, it implies a very special weight of past decisions on current welfare prospects, which appears largely inconsistent with forgetfulness – even if not with learning – and memory effects, often stressed or embedded in behavioral science studies. In this article, we explore the modifications induced by generalizing the typical welfare function in order to accommodate such retrospective influences. The idea is simple – and can be thought inspired in felicity functions encompassing habit formation: to allow for accumulated welfare – of hypothetically “compounded” but also depreciating past-to-current felicity streams – to affect the periodic utility function – which therefore enjoy some durable good properties. Sensitivity of the Ramsey optimal path to the new formulation is also inspected. The mathematical principle has useful production theory applications: in supply chain modelling. Then the optimal depth of a production process stems from a standard problem that now also embeds delay evaluation – discounting; a rationale for a particular pattern of the term structure of interest rates was also forwarded. Growth – general equilibrium - models are extended to allow for the hypothesis.
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Bibliographic InfoPaper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2007_07.
Date of creation: 07 Jul 2007
Date of revision:
Time Discount; Time Preference; Interest; Retrospect Theory; Durable Goods; Durable Felicity Functions; Vertical Production Systems; Intertemporal Economies of Depth; Supply Chains; Networks; Complexity; Consistency; Term Structure of Interest Rates.;
Other versions of this item:
- Ana Paula Martins, 2012. "On Depth and Retrospect: “I Forget, and Forgive – but I Discount”," Journal of Economics and Econometrics, Economics and Econometrics Research Institute (EERI), Brussels, vol. 55(3), pages 1-45.
- D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G00 - Financial Economics - - General - - - General
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
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- Ana Paula Martins, 2010.
"Splitting Games: Nash Equilibrium and the Optimisation Problem,"
Journal of Economics and Econometrics,
Economics and Econometrics Research Institute (EERI), Brussels, vol. 53(1), pages 1-28.
- Ana Paula Martins, 2010. "Splitting Games: Nash Equilibrium and the Optimisation Problem," EERI Research Paper Series EERI_RP_2010_36, Economics and Econometrics Research Institute (EERI), Brussels.
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