Discounting and the Time Preference Rate

19 Pages Posted: 19 Mar 2008

See all articles by John Creedy

John Creedy

University of Melbourne - Department of Economics

Ross S. Guest

Griffith University - School of Accounting and Finance - Gold Coast Campus

Abstract

This paper provides an analytical review of the evaluation of alternative time streams of consumption and the closely related concept of time preference. The potential sensitivity of comparisons, especially to the choice of time preference rate and elasticity of marginal valuation, is demonstrated. The nature of time preference, based on an axiomatic approach, is then discussed. The analysis of optimisation over time leads to the concept of the social time preference rate, and a difficulty with using this rate is highlighted. Approaches giving rise to declining discount rates over time are discussed, including alternative welfare functions and the role of uncertainty. This is followed by a critique of methods used to estimate a time preference rate. Finally, complications introduced by non-income differences between individuals are examined. Emphasis is placed on the central role of value judgements.

Suggested Citation

Creedy, John and Guest, Ross, Discounting and the Time Preference Rate. Economic Record, Vol. 84, Issue 264, pp. 109-127, March 2008. Available at SSRN: https://ssrn.com/abstract=1106452 or http://dx.doi.org/10.1111/j.1475-4932.2008.00450.x

John Creedy (Contact Author)

University of Melbourne - Department of Economics ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia
+61 800 666 300 (Phone)
+61 3 9347 3986 (Fax)

Ross Guest

Griffith University - School of Accounting and Finance - Gold Coast Campus ( email )

PMB 50 Gold Coast Mail Centre
9726 Queensland
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
13
Abstract Views
516
PlumX Metrics