The nature of discounting
From monetary policies to the climate change problem, from the burden of private credit card debts to the evaluation of public projects, discount rate is the central issue, yet there is little clear understanding about the nature of discounting. In this paper, applying a newly developed production theory, we discuss how discount rate is related to other factors in social systems, such as risk, duration of production, fixed cost in production and market size. The relations among different factors in a social system put constraints on the ranges of discount rate that are viable in particular environments. Our findings have strong policy implications. In a world of increasing cost of extracting natural resources, the continuation of low discount rate policy will generate wide gyration of social systems that we have witnessed in recent years.
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- Jing Chen, 2005. "Imperfect Market or Imperfect Theory: A Unified Analytical Theory of Production and Capital Structure of Firms," Finance 0509009, EconWPA.
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- Jing Chen & James K. Galbraith, 2011. "Institutional Structures and Policies in an Environment of Increasingly Scarce and Expensive Resources: A Fixed Cost Perspective," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 45(2), pages 301-308, June.
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- Jing Chen, 2006. "An analytical theory of project investment: a comparison with real option theory," International Journal of Managerial Finance, Emerald Group Publishing, vol. 2(4), pages 354-363, September.
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- Jing Chen & James K. Galbraith, 2012. "A Common Framework for Evolutionary and Institutional Economics," Journal of Economic Issues, M.E. Sharpe, Inc., vol. 46(2), pages 419-428, June.
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