 Evaluating Time Streams of Income: Discounting What?Manel Baucells and Rakesh Sarin () Theory and Decision, 2007, vol. 63, issue 2, 95-120 Abstract: For decisions whose consequences accrue over time, there are several possible techniques to compute total utility. One is to discount utilities of future consequences at some appropriate rate. The second is to discount per-period certainty equivalents. And the third is to compute net present values (NPVs) of various possible streams and to then apply the utility function to these net present values. We find that the best approach is to first compute NPVs of various possible income streams and then take the utility of such NPVs. We show the drawbacks of other alternative models of evaluating income streams. The article discusses the advantages of the power and logarithmic forms in the modeling of time preference. These are the only forms for which utility of income and utility of consumption are strategically equivalent. Further, these forms permit the flexibility in the choice of a time period (e.g., monthly or quarterly) without modifying the utility function, thus simplifying analysis. Copyright Springer Science+Business Media LLC 2007 Keywords: discounted utility; indirect utility of income; net present value; time preference (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:theord:v:63:y:2007:i:2:p:95-120 Ordering information: This journal article can be ordered from DOI: 10.1007/s11238-007-9045-3 Access Statistics for this article Theory and Decision is currently edited by Mohammed Abdellaoui More articles in Theory and Decision from Springer |
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