Hyperbolic Discounting Is Rational: Valuing the Far Future with Uncertain Discount Rates

J. Doyne Farmer and John Geanakoplos ()
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J. Doyne Farmer: Sante Fe Institute
John Geanakoplos: Cowles Foundation, Yale University, http://cowles.econ.yale.edu/faculty/geanakoplos.htm

No 1719, Cowles Foundation Discussion Papers from Cowles Foundation, Yale University

Abstract: Conventional economics supposes that agents value the present vs. the future using an exponential discounting function. In contrast, experiments with animals and humans suggest that agents are better described as hyperbolic discounters, whose discount function decays much more slowly at large times, as a power law. This is generally regarded as being time inconsistent or irrational. We show that when agents cannot be sure of their own future one-period discount rates, then hyperbolic discounting can become rational and exponential discounting irrational. This has important implications for environmental economics, as it implies a much larger weight for the far future.

Keywords: Hyperbolic discounting; Environment; Time consistent; Exponential discounting; Geometric random walk; Term structure of interest rates (search for similar items in EconPapers)
JEL-codes: D91 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env and nep-neu
Date: 2009-08
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