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Foundations and Properties of Time Discount Functions

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  • Ali al-Nowaihi
  • Sanjit Dhami

Abstract

A critical element in all discounted utility models is the specification of a discount function. We extend the standard model to allow for reference points for both out- comes and time. We consider the axiomatic foundations and properties of two main classes of discount functions. The first, the Loewenstein-Prelec discount function, accounts for declining impatience but cannot account for the evidence on subadditivity. A second class of discount functions, the Read-Scholten discount function accounts for declining impatience and subadditivity. We derive restrictions on an individual’s preferences to expedite or to delay an outcome that give rise to the discount functions under consideration. As an application of our framework we consider the explanation of the common difference effect.

Suggested Citation

  • Ali al-Nowaihi & Sanjit Dhami, 2013. "Foundations and Properties of Time Discount Functions," Discussion Papers in Economics 13/27, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:13/27
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    References listed on IDEAS

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    1. Charemza, Wojciech & Díaz, Carlos & Makarova, Svetlana, 2019. "Quasi ex-ante inflation forecast uncertainty," International Journal of Forecasting, Elsevier, vol. 35(3), pages 994-1007.

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    More about this item

    Keywords

    Hyperbolic discounting; Subadditive and superadditive discounting; Prospect theory;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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