A NEW ARGUMENT IN FAVOR OF HYPERBOLIC DISCOUNTING IN VERY LONG TERM PROJECT APPRAISAL

Salvador Cruz Rambaud

International Journal of Theoretical and Applied Finance (IJTAF), 2014, vol. 17, issue 08, 1-17

Abstract: This paper characterizes the long term social discount rate (SDR) in terms of indices of variation and identifies a class of discount functions that assign weight to the distant future in terms of the asymptotes of their hazard rates. Let A(t) be a discount function supported on [0, +∞[, whose instantaneous discount rate is δ(t) = -(ln A(t))′. In this paper, we study the limiting behavior of δ(t) and a criterion to relate this limit to so-called long and heavy-tailed discount functions. Moreover, we study the discount functions of regular variation and, more specifically, the rapidly and the slowly-varying (singular) discount functions. In this way, the hyperbolic discounting exhibits long (and then heavy) tailedness, and it is intermediate between rapidly and the slowly-varying discount functions, which makes it a suitable function for long term discounting processes.

Keywords: Discount function; hyperbolic discounting; instantaneous discount rate; long and heavy tailedness; regular variation (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219024914500496

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