Discounting When Income is Stochastic and Discounted Utility Anomalies

24 Pages Posted: 22 Mar 2010 Last revised: 6 Apr 2010

See all articles by Svetlana Boyarchenko

Svetlana Boyarchenko

University of Texas at Austin - Department of Economics

Sergei Levendorskii

Calico Science Consulting

Date Written: March 15, 2010

Abstract

Several discounted utility anomalies are explained as rational choices of an agent with standard preferences and stochastic income. We define the term structure of absolute risk aversion and demonstrate that the gain-loss asymmetry is observed for small gains and losses and a general utility function if the term structure is non-decreasing. Agents, whose current income is less than the long-run average by a certain margin, exhibit hyperbolic discounting. The discount rate of agents, whose current income is above the central tendency, is increasing. Agents who are neither rich nor poor have hump-shaped discount rate curves.

Keywords: time preference, discounted utility anomalies

JEL Classification: D81, D91

Suggested Citation

Boyarchenko, Svetlana I. and Levendorskii, Sergei Z., Discounting When Income is Stochastic and Discounted Utility Anomalies (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1571753 or http://dx.doi.org/10.2139/ssrn.1571753

Svetlana I. Boyarchenko (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Sergei Z. Levendorskii

Calico Science Consulting ( email )

Austin, TX
United States

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