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The nature of discounting


  • Chen, Jing


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.

Suggested Citation

  • Chen, Jing, 2012. "The nature of discounting," Structural Change and Economic Dynamics, Elsevier, vol. 23(3), pages 313-324.
  • Handle: RePEc:eee:streco:v:23:y:2012:i:3:p:313-324 DOI: 10.1016/j.strueco.2012.06.001

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    References listed on IDEAS

    1. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    2. Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
    3. Jing Chen & James Galbraith, 2011. "Institutional Structures and Policies in an Environment of Increasingly Scarce and Expensive Resources: A Fixed Cost Perspective," Journal of Economic Issues, Taylor & Francis Journals, vol. 45(2), pages 301-308.
    4. 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.
    5. Newell, Richard G. & Pizer, William A., 2003. "Discounting the distant future: how much do uncertain rates increase valuations?," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 52-71, July.
    6. Berns, Gregory S. & Loewenstein, George & Laibson, David I., 2007. "Intertemporal Choice - Toward an Integrative Framework," Scholarly Articles 4554332, Harvard University Department of Economics.
    7. Jing Chen & James Galbraith, 2012. "A Common Framework for Evolutionary and Institutional Economics," Journal of Economic Issues, Taylor & Francis Journals, vol. 46(2), pages 419-428.
    8. Jing Chen, 2005. "Imperfect Market or Imperfect Theory: A Unified Analytical Theory of Production and Capital Structure of Firms," Finance 0509009, EconWPA.
    9. Jing Chen & James Galbraith, 2012. "Austerity and fraud under different structures of technology and resource abundance," Cambridge Journal of Economics, Oxford University Press, vol. 36(1), pages 335-343.
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    More about this item


    Discounting; Risk; Fixed cost; Monetary policy;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit


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