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Discounting, Values, and Decisions

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  • John K.-H. Quah
  • Bruno Strulovici

Abstract

How do discount rates affect agents' decisions and valuations? This paper provides a general method to analyze this question, allowing stochastic and managed cash flows, stochastic discount rates, and time inconsistency and including arbitrary learning and payoff or utility processes. We show that some of these features can lead to counterintuitive answers (e.g., "a more patient agent stops earlier"), but we also establish, under simple conditions, theorems yielding robust predictions concerning the impact of discount rates on control and stopping decisions and on valuations. We apply our theory to models of search, experimentation, bankruptcy, optimal growth, investment, and social learning.

Suggested Citation

  • John K.-H. Quah & Bruno Strulovici, 2013. "Discounting, Values, and Decisions," Journal of Political Economy, University of Chicago Press, vol. 121(5), pages 896-939.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/673867
    DOI: 10.1086/673867
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    Citations

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    Cited by:

    1. Escudé, Matteo & Sinander, Ludvig, 2023. "Slow persuasion," Theoretical Economics, Econometric Society, vol. 18(1), January.
      • Matteo Escud'e & Ludvig Sinander, 2019. "Slow persuasion," Papers 1903.09055, arXiv.org, revised Apr 2022.
    2. Ke, T. Tony & Villas-Boas, J. Miguel, 2019. "Optimal learning before choice," Journal of Economic Theory, Elsevier, vol. 180(C), pages 383-437.
    3. Strulovici, Bruno & Szydlowski, Martin, 2015. "On the smoothness of value functions and the existence of optimal strategies in diffusion models," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 1016-1055.
    4. Strulovici, Bruno & Szydlowski, Martin, 2012. "On the Smoothness of Value Functions," MPRA Paper 36326, University Library of Munich, Germany, revised 31 Jan 2012.
    5. Th'eo Durandard & Matteo Camboni, 2024. "Comparative Statics for Optimal Stopping Problems in Nonstationary Environments," Papers 2402.06999, arXiv.org, revised Jul 2024.
    6. Ron Siegel & Bruno Strulovici, 2015. "On the Design of Criminal Trials: The Benefits of a Three-Verdict System," Discussion Papers 1581, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Kaufmann, Marc, 2022. "Projection bias in effort choices," Games and Economic Behavior, Elsevier, vol. 135(C), pages 368-393.
    8. Mark Whitmeyer, 2024. "Comparative Patience," Papers 2407.02323, arXiv.org.
    9. Alexander Groves, 2013. "Identifying What is tempting," Working Papers ECARES 2013-41, ULB -- Universite Libre de Bruxelles.
    10. Sadler, Evan, 2021. "Dead ends," Journal of Economic Theory, Elsevier, vol. 191(C).
    11. Choi, Kyoung Jin & Kwak, Minsuk & Shim, Gyoocheol, 2017. "Time preference and real investment," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 18-33.
    12. Gorno, Leandro & Iachan, Felipe S., 2020. "Competitive real options under private information," Journal of Economic Theory, Elsevier, vol. 185(C).
    13. Chiaki Hara, 2019. "Heterogeneous Impatience of Individual Consumers and Decreasing Impatience of the Representative Consumer," KIER Working Papers 1009, Kyoto University, Institute of Economic Research.
    14. Sokolov, Mikhail V., 2024. "NPV, IRR, PI, PP, and DPP: A unified view," Journal of Mathematical Economics, Elsevier, vol. 114(C).
    15. Sandroni, Alvaro & Urgun, Can, 2017. "Dynamics in Art of War," Mathematical Social Sciences, Elsevier, vol. 86(C), pages 51-58.
    16. Doruk Cetemen & Felix Zhiyu Feng & Can Urgun, 2019. "Contracting with Non-Exponential Discounting: Moral Hazard and Dynamic Inconsistency," Working Papers 2019-17, Princeton University. Economics Department..
    17. Ebert, Sebastian & Wei, Wei & Zhou, Xun Yu, 2020. "Weighted discounting—On group diversity, time-inconsistency, and consequences for investment," Journal of Economic Theory, Elsevier, vol. 189(C).
    18. Martin Dumav, 2021. "Moral Hazard, Dynamic Incentives, and Ambiguous Perceptions," Papers 2110.15229, arXiv.org.
    19. Chaves, Isaías N. & Ichihashi, Shota, 2024. "Auction timing and market thickness," Games and Economic Behavior, Elsevier, vol. 143(C), pages 161-178.
    20. Schosser, Josef, 2016. "Time (in)consistency and real options: Much ado about nothing?," Mathematical Social Sciences, Elsevier, vol. 82(C), pages 77-84.

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