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Discount Rates and the Distribution of Lifetime Earnings

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  • Keith Hancock
  • Sue Richardson

Abstract

The logic of human capital theory implies that the present values of lifetime earnings are computed using the discount rate applied by individuals when making their labor market choices. Further, inequalities will appear when higher or lower discount rates are applied. Our empirical tests confirm that there is a discount rate (of around 10 percent) which minimizes differences in lifetime earnings. A further inference-that there is a negative correlation between two rankings of lifetime earnings when these rankings are computed using discount rates which are, respectively, lower and higher than "the" rate-is also supported empirically.

Suggested Citation

  • Keith Hancock & Sue Richardson, 1985. "Discount Rates and the Distribution of Lifetime Earnings," Journal of Human Resources, University of Wisconsin Press, vol. 20(3), pages 346-360.
    • Handle: RePEc:uwp:jhriss:v:20:y:1985:i:3:p:346-360
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    Cited by:

    1. Gustafsson, Johan, 2021. "Implications of Pension Illiteracy for Labor Supply and Redistribution," Umeå Economic Studies 993, Umeå University, Department of Economics.
    2. Gustafsson, Johan, 2023. "Public pension reform with ill-informed individuals," Economic Modelling, Elsevier, vol. 121(C).
    3. Muhammad Yasir, 2015. "Investigating the Real Shocks in the Discount Rate of Pakistan," South Asian Journal of Management Sciences (SAJMS), Iqra University, Iqra University, vol. 9(1), pages 10-14, Spring.

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