Discounting, Patience, and Dynamic Decision Making

John Quah and Bruno Strulovici

No 555, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: 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.

Keywords: Capital growth; Comparative statics; Discounting; Internal rate of return; Optimal control; Optimal stopping; Patience; Presence value; Project Valuation (search for similar items in EconPapers)
JEL-codes: C61 D81 D90 E2 G11 G31 (search for similar items in EconPapers)
Date: 2011-06-01
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