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Discounting, Patience, and Dynamic Decision Making

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  • John Quah
  • Bruno Strulovici

Abstract

Whether they are financial, economic, or psychological, discount rates affect most economic decisions: investment and savings, hirings and firings, defaults and refinancing, financial and economic reforms, learning and experimentation, and any other decision with long-term consequences, such as gas emissions control.� This paper studies these questions in a unified framework, providing general insights and results showing how discounting affects i) the expected utility of an agent, ii) the timing and the magnitude of his decisions, and iii) the path of underlying state variables controlled by the agent.� The analysis includes the case of a time-inconsistent agent and of stochastic discounting.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 555.

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Date of creation: 01 Jun 2011
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Handle: RePEc:oxf:wpaper:555

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Keywords: Capital growth; Comparative statics; Discounting; Internal rate of return; Optimal control; Optimal stopping; Patience; Presence value; Project Valuation;

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  17. Drazen Prelec, 2004. "Decreasing Impatience: A Criterion for Non-stationary Time Preference and "Hyperbolic" Discounting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 511-532, October.
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