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Evaluation of intertemporal streams

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  • Pavlo R. Blavatskyy

    (MBS School of Business)

Abstract

Would you rather receive your salary in one paycheck in one month or—one half of it in one month and the other half paid out in slightly more than one month? The first option dominates the second option in terms of first-order temporal dominance. Yet, standard models of intertemporal choice such as discounted utility (also known as constant or exponential discounting), hyperbolic or quasi-hyperbolic discouning with a concave utility function predict a preference for the dominated alternative. This paper presents a minor modification of these standard models to avoid such violations of first-order temporal dominance. Applications to optimal savings and evaluation of a perpetuity are provided.

Suggested Citation

  • Pavlo R. Blavatskyy, 2025. "Evaluation of intertemporal streams," Journal of Risk and Uncertainty, Springer, vol. 70(2), pages 129-146, April.
    • Handle: RePEc:kap:jrisku:v:70:y:2025:i:2:d:10.1007_s11166-025-09450-0
    DOI: 10.1007/s11166-025-09450-0
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