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Discounting, Patience, and Dynamic Decision Making

  • John Quah
  • Bruno Strulovici

Whether they are financial, economic, or psychological, discount rates affect most economic decisions: investment and savings, hirings and firings, defaults and refinancing, financial and economic reforms, learning and experimentation, and any other decision with long-term consequences, such as gas emissions control. This paper studies these questions in a unified framework, providing general insights and results showing how discounting affects i) the expected utility of an agent, ii) the timing and the magnitude of his decisions, and iii) the path of underlying state variables controlled by the agent. The analysis includes the case of a time-inconsistent agent and of stochastic discounting.

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File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper555.pdf
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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 555.

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Date of creation: 01 Jun 2011
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Handle: RePEc:oxf:wpaper:555
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  10. Bruno Strulovici, 2008. "Learning while voting: determinants of collective experimentation," Economics Papers 2008-W08, Economics Group, Nuffield College, University of Oxford.
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  12. Drazen Prelec, 2004. "Decreasing Impatience: A Criterion for Non-stationary Time Preference and "Hyperbolic" Discounting," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 511-532, October.
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  16. Gustavo Manso & Bruno Strulovici & Alexei Tchistyi, 2010. "Performance-Sensitive Debt," Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1819-1854.
  17. Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
  18. Nachman, David C., 1975. "Risk aversion, impatience, and optimal timing decisions," Journal of Economic Theory, Elsevier, vol. 11(2), pages 196-246, October.
  19. Cripps, Martin William & Keller, R Godfrey & Rady, Sven, 2003. "Strategic Experimentation with Exponential Bandits," CEPR Discussion Papers 3814, C.E.P.R. Discussion Papers.
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