Exponential discounting

Exponential discounting

In economics exponential discounting refers to a specific form of the discount function, used in the analysis of choice over time (with or without uncertainty). Formally, exponential discounting occurs when total utility is given by

:U({c_t}_{t=t_1}^{t_2})=sum_{t=t_1}^{t_2}eta^{t-t_1}(u(c_t)),

where c_t is consumption at time t, eta is the exponential discount factor, and u(cdot) is the instantaneous utility function.

In continuous time, exponential discounting is given by

:U({c(t)}_{t=t_1}^{t_2})=int_{t_1}^{t_2} e^{- ho (t-t_1)}u(c(t))dt,

Exponential discounting implies that the marginal rate of substitution between consumption at any pair of points in time depends only on how far apart those two points are. Exponential discounting is not dynamically inconsistent.

For its simplicity, the exponential discounting assumption is the most commonly used in economics. However, some alternatives have more empirical support.


Wikimedia Foundation. 2010.

Игры ⚽ Нужно решить контрольную?

Look at other dictionaries:

  • Hyperbolic discounting — In behavioral economics, hyperbolic discounting refers to the empirical finding that people generally prefer smaller, sooner payoffs to larger, later payoffs when the smaller payoffs would be imminent; but when the same payoffs are distant in… …   Wikipedia

  • Dynamic inconsistency — In economics, dynamic inconsistency, or time inconsistency, describes a situation where a decision maker s preferences change over time in such a way that what is preferred at one point in time is inconsistent with what is preferred at another… …   Wikipedia

  • Discounted cash flow — Excel spreadsheet uses Free cash flows to estimate stock s Fair Value and measure the sensibility of WACC and Perpetual growth In finance, discounted cash flow (DCF) analysis is a method of valuing a project, company, or asset using the concepts… …   Wikipedia

  • Discount function — A discount function is used in economic models to describe the weights placed on rewards received at different points in time. For example, if time is discrete and utility is time separable, with the discount function f(t) with c(t) defined as… …   Wikipedia

  • Time value of money — The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. The time value of money is the central concept in finance theory. For example, $100 of today s money invested for one year… …   Wikipedia

  • Walmart — For other uses, see Walmart (disambiguation). Wal Mart Stores, Inc. Walmart logo, used from June 30, 2008 present …   Wikipedia

  • Public order crime — For relevant case law, see Public order crime case law in the United States In criminology public order crime is defined by Siegel (2004) as ...crime which involves acts that interfere with the operations of society and the ability of people to… …   Wikipedia

  • Marketing-mix models — measure the impact of marketing activities, competitive effects and market environment on sales of a product. This method is extensively used in Consumer Packaged Goods (CPG) industry, although it is now being adopted in retail, telecom and… …   Wikipedia

  • Predicting the timing of peak oil — M. King Hubbert, who devised the peak theory, correctly predicted in 1956 that oil production would peak in the United States between 1965 and 1970Nuclear Energy and the Fossil Fuels,M.K. Hubbert, Presented before the Spring Meeting of the… …   Wikipedia

  • basketball — /bas kit bawl , bah skit /, n. 1. a game played by two teams of usually five players each on a rectangular court having a raised basket or goal at each end, points being scored by tossing the ball through the opponent s basket. 2. the round,… …   Universalium

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”