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Discounting and the Time Preference Rate: An Introduction

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  • John Creedy
  • Ross Guest

Abstract

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.

Suggested Citation

  • John Creedy & Ross Guest, 2007. "Discounting and the Time Preference Rate: An Introduction," Department of Economics - Working Papers Series 993, The University of Melbourne.
    • Handle: RePEc:mlb:wpaper:993
    as

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    File URL: http://fbe.unimelb.edu.au/__data/assets/pdf_file/0004/802795/993.pdf
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    References listed on IDEAS

    as
    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. John Creedy, 2007. "Discounting and the Social Time Preference Rate," Department of Economics - Working Papers Series 989, The University of Melbourne.
    3. John Creedy, 2006. "Evaluating Policy: Welfare Weights And Value Judgements," Department of Economics - Working Papers Series 971, The University of Melbourne.
    4. André Decoster & Erwin Ooghe, 2002. "Weighting with individuals, equivalent individuals, or not weighting at all. Does it matter empirically?," Public Economics Working Paper Series ces0215, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
    5. 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.
    6. Pasquale Scaramozzino & Giancarlo Marini, 2000. "Social time preference," Journal of Population Economics, Springer;European Society for Population Economics, vol. 13(4), pages 639-645.
    7. Anthony Shorrocks, 2004. "Inequality and welfare evaluation of heterogeneous income distributions," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 2(3), pages 193-218, July.
    8. Sir Nicholas Stern, 2006. "What is the Economics of Climate Change?," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 7(2), pages 1-10, April.
    9. Anthony F. Shorrocks, 2004. "Inequality and Welfare Evaluation of Heterogeneous Income Distributions," WIDER Working Paper Series RP2004-01, World Institute for Development Economic Research (UNU-WIDER).
    10. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
    11. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
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