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Discounting and the Time Preference Rate: An Introduction

  • John Creedy
  • Ross Guest

This paper provides an introduction to the evaluation of alternative time streams of consumption and the closely related concept of time preference. The potential sensitivity of comparisons, especially to the choice of time preference rate and elasticity of marginal valuation, is demonstrated. The nature of time preference, based on an axiomatic approach, is then discussed. The analysis of optimisation over time leads to the concept of the social time preference rate, and a difficulty with using this rate is highlighted. Finally, complications introduced by non-income differences between individuals are examined. Emphasis is placed on the central role of value judgements.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 993.

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Length: 25 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mlb:wpaper:993
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
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  1. Peter A. Diamond & Tjalling C. Koopmans & Richard E. Williamson, 1962. "Stationary Utility and Time Preference," Cowles Foundation Discussion Papers 142, Cowles Foundation for Research in Economics, Yale University.
  2. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
  3. John Creedy, 2006. "Evaluating Policy: Welfare Weights And Value Judgements," Department of Economics - Working Papers Series 971, The University of Melbourne.
  4. Anthony Shorrocks, 2004. "Inequality and welfare evaluation of heterogeneous income distributions," Journal of Economic Inequality, Springer, vol. 2(3), pages 193-218, July.
  5. Shorrocks, Anthony, 2004. "Inequality and Welfare Evaluation of Heterogeneous Income Distributions," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. John Creedy, 2007. "Discounting and the Social Time Preference Rate," Department of Economics - Working Papers Series 989, The University of Melbourne.
  7. Pasquale Scaramozzino & Giancarlo Marini, 2000. "Social time preference," Journal of Population Economics, Springer, vol. 13(4), pages 639-645.
  8. Glewwe, Paul, 1991. "Household equivalence scales and the measurement of inequality : Transfers from the poor to the rich could decrease inequality," Journal of Public Economics, Elsevier, vol. 44(2), pages 211-216, March.
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