Discounting, patience, and dynamic decision making

Working paper

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.

Authors: Quah, J; Strulovici, B

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Publication date: 2011-06-01
• Paper number: 555
• Keywords: presence value; internal rate of return; patience; project valuation; optimal control; capital growth; discounting; optimal stopping; comparative statics